It has been more than two years since the financial and economic crash of 2008. Since then, many things have improved, and the U.S. economy is officially out of recession. But many Americans are still hurting. Unemployment remains high, and the housing market is far from settled. We invited economists and other astute financial observers from across the political spectrum to suggest what, if anything, the government should do to stimulate the economy.
Stimulus: neither needed nor free
By John H. Cochrane
Should the government do more to "stimulate" the economy? No.
Before fixing a car, it's a good idea to figure out what's not working. If the starter is broken, "step on the gas" is not the right answer. The same is true for the economy.
Why are we in the doldrums? Most answers to this question point to structural, tax and regulation problems. For example, one consequence of 99 weeks of unemployment benefits is that people tend to stay unemployed longer rather than take an unattractive job or move. That may be the right and humane policy, but it also means that unemployment will remain high, no matter how much stimulus we do. Looming healthcare, labor market regulation, and tax and regulatory uncertainty make it even harder for companies to hire. Congress has not even started debating what taxes will be Jan. 1. How can anyone plan?
"Inadequate stimulus" is an unlikely diagnosis for our problems. Banks are sitting on about $1 trillion in reserves, up from $50 billion before the recession. If they don't want to lend the first trillion, is giving them another half-trillion going to make any difference? The Fed did a great job of putting out the fire in the financial crisis. Alas, once the fire is out, more water will not make the house grow back.
More "stimulus" is not free. Additional "fiscal stimulus" -- borrowing and spending -- means higher taxes later on, which could usher in a low-growth lost decade -- or, worse, a calamity if investors decide not to renew loans to the U.S. Plus, it's unlikely that taking money from A and giving it to B makes us all better off anyway. Additional monetary stimulus, along with efforts to devalue the dollar, threaten the whole world financial and trade system.
We need to solve the nation's actual economic problems, most of them created by rampant government-induced uncertainty, rather than papering them over with more "stimulus."
John H. Cochrane is a professor of finance at the University of Chicago, Booth School of Business. His website is at http://faculty.chicagobooth.edu/ john.cochrane/research/Papers.
Federal spending is a necessity
By Joseph Stiglitz
The only solution to our current economic doldrums is large government spending. And if the spending is focused on high-return investments (in education, technology and infrastructure), the nation's debt-to-GDP ratio will actually be lowered. The question isn't whether we can afford to make these investments; we can't afford not to.
Even then, robust recovery won't happen until we write down the debts of the 1 in 4 homes whose mortgages are underwater, in a homeowner's chapter 11 program. We have allowed overburdened corporations a fresh start; why not poor Americans?
Nor will a robust recovery return until we get our dysfunctional financial system doing what it should be doing: providing credit, managing risk, running an efficient electronic payments system. The deservedly hated "bailout" may have kept the financial system from collapsing, but it also extended the government's safety mainly to rich and powerful banks. Smaller banks, focused on actually providing credit to small businesses, the lifeblood of any economy, were allowed to die. The Dodd-Frank regulatory bill was a step in the right direction, but it was a small step, with neither carrots nor sticks to ensure that banks go back to doing "boring" banking. They still are likely to make more money from credit schemes and predatory lending, from writing derivatives and credit default swaps (which may be viewed as gambling or insurance products but aren't regulated as either and are underwritten by taxpayers), and by imposing a tax on every credit and debit card transaction at a rate determined not by competitive forces but the exertion of monopoly power.
When Presidents George W. Bush and Obama went about pouring money into the banking system, they did it without a vision of what kind of financial system would best serve the country in the new century. Little of the stimulus money went to reshape the country, to make it more competitive, more dynamic, more respectful of the environment or less unequal. Had we had that vision, we could have structured what we did in the short run in a way that fostered a more robust recovery -- with more jobs and in a better position for long-term growth with a lower debt. It's still not too late, but we have wasted both valuable time and money.