A Two-Track Plan to Restore Growth

John B. Taylor and The Wall Street Journal provide some insight for the path forward.  First, a reiteration of what we already know:


It’s been three years since the financial crisis flared up and the recession began. Yet the unemployment rate is still over 9%—double what it was before the recession—and it’s been stuck above 9% for 20 consecutive months. Why the extraordinarily high and prolonged unemployment? My research shows that discretionary government interventions—deviations from sound economic principles and policies—have been largely responsible.

Many government interventions occurred before the panic in the fall of 2008, but in the past two years the government doubled down. We have seen an $862 billion stimulus, an increase in federal spending to 25% from 21% of GDP, and a corresponding explosion of federal debt. We have the Fed’s unconventional “quantitative easings”: purchases of $1.25 trillion of mortgage backed securities and $900 billion of longer-term Treasury bonds. And we have seen hundreds of new regulations in the health and financial sectors.

The one-time stimulus payments to people did not jump-start consumption. The stimulus grants to states did not increase infrastructure spending. Cash for clunkers merely shifted consumption a few months forward. The Fed’s purchases did not have a material impact on mortgage interest rates once changes in risks are taken into account. At best these actions had a small temporary effect that dissipated quickly, leaving a legacy of higher debt, a bloated Fed balance sheet and uncertainty—all of which slow growth and job creation.

None of this should be surprising. Well-known theories of consumption predict that temporary payments to households will not increase economic growth by much. Careful empirical studies of stimulus programs in the 1970s showed that stimulus grants to states did not increase infrastructure spending. A vast literature and experience from the 1970s show that discretionary monetary policy, as distinct from rules-based policy, leads to boom-bust cycles with ultimately higher unemployment and higher inflation. With sounder, more stable and more predictable monetary and fiscal policies in the 1980s and ’90s we had long expansions and lower unemployment.

Just a gentle reminder for the liberals proffering the ‘we gotta have gov’t spending’ baloney.  It doesn’t work.  It never has.  Pols sell that crock of crap to you so they can control programs that help their reelection efforts.

The rest:

Unfortunately, the president’s State of the Union speech raised doubts about the return to sound policy by stressing more government spending and criticizing further extensions of current personal income tax rates. So it is essential for policy makers to grab the policy pendulum, pull it back toward sound fiscal and monetary policy, and tie it in place so it never swings back again.

They should start by laying out a credible plan to reduce spending and stop the debt explosion. If spending as a share of GDP can be brought to 2000 levels and held there with entitlement reforms, then the budget can be balanced without employment-retarding tax-rate increases. A concrete goal should be to establish a long-term budget that the Congressional Budget Office (CBO) can credibly show would bring the debt-to-GDP ratio to 40%. If the plan is ready for this summer’s CBO long-term projections, it will give an immediate boost to economic growth and job creation as uncertainty about debt sustainability falls. An example of what the CBO’s next projection might look like is shown in the nearby chart of U.S. debt history along with the CBO’s projections made in 2009, 2010 and, if the plan is ready, in 2011.

Of course, President Obama is clueless on the solution.  He’s in over his head with no help from a clueless brigade of sycophants.


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