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The Fed? Don't make me laugh so hard when drinking my coffee
Brad DeLong has been out of Washington too long. This isn't necessarily a bad thing, though honestly I would much rather have Dr. DeLong on the FOMC than all of the members whose last names end with "B". Part of the reason is his statement "The principal organization for successful stabilization policy is the Federal Reserve." Would that this were how Greenspan and Bernanke viewed it. Instead of as a prop for particular fiscal policy goals - upper income tax reductions and wars in Iraq - while thwarting others.
But there are several things to scratch heads over in the post.
The case for fiscal stimulus being better than monetary stimulus is, in fact, fairly strong at this point, precisely because monetary policy ,while it hasn't "shot its bolt" - wad is correct here, since that's what cash comes in, wads - it is already at the point of creating more inflationary pressure through devaluation and through lack of moral hazards than it will do good. At least, that is what oil in the 90-100 dollar a barrel region, with the dollar at historical lows should tell people. A weak dollar is the way that the world economy tells us they don't want our dollars.
Moreover, given the absolute carnage in the housing industry, it is not clear that borrowers will go back to building, but instead may well use lower rates merely for refinancing. This will bail out casino developers in Las Vegas who have defaulted on three quarters of a billion dollar loans, but will be unlikely to put anyone to work. Even with monetary stimulus, it would take more than a year for fed stimulus to work. And then there is that nagging inflation problem, which lower rates would make worse. Even if it worked it is an industry that puts further upwards pressure on materials costs for the amount of economic activity.
Thus Federal Reserve stabilization fails the very measures of timely, effective and targeted. It helps those borrowing money, and as we've seen this is the home building industry.
The other thing that Dr. DeLong seems to have forgotten is that if it came from trees, then Congress can hang ornaments on it. Nothing could have been cleaner than the bill to remove subsidies in compliance with a WTO ruling. It was, eventually, hung with more ornaments than any Christmas tree that has ever been displayed in public. No room for ornaments isn't possible, except if the executive branch uses some kind of discretionary authority to divert money. Again, the present reality puts this in the "fat chance" column.
It's also not clear that tax credits are timely, or at least as timely. Here is something that even Bush's economic team managed to get right, and that is decreasing the amount of withholding. Do this in combination with a tax credit, and instead of getting checks some months from now, the money arrives immediately, and can be accounted for later.
This would create pressure on Congress to pass a cleaner bill: the money has already gone out, and if the bill is not passed by April 15th, then there will be taxpayers owing money, and a President who is not running for anything ever again can push a Congress that is running all the time, to act quickly, and therefore at least minimize the time to lard up the bill that is sent.
It means that there will be junk on it, that the President will have to sign, rather than veto, but that is happening anyway with any stimulus bill. Moreover, because stimulus bills with tax credits are tax bills, and have that procedural quality to them, there is tremendous temptation to lard them up. If this is the only tax bill happening this year, then tax breaks will gravitate towards it.
It would be nice to point out that many people who are truly at the bottom will not see a tax credit, simply because they pay FICA and not Income Taxes, and do not qualify for the EITC.
Thus if the package were truly "anti-regressive" it might well deem that any tax credits can produce a negative tax burden, and therefore give a refund regardless of whether the taxpayer qualifies for it. And even better might be for the IRS to track down taxpayers who don't file, since many of these people either owe taxes or don't earn much, in order that these people actually get the check. If anti-regressive is the name of the game, then the Executive is within its powers to order the IRS to do a kind of reverse enforcement.
I'm not sure why DeLong says that Krugman gets it wrong here, Krugman said that Obama's plan was the most restrained and conservative. And it is, and that is precisely why DeLong likes it the best of the three plans: it is the most restrained and it would arrive at around the time that DeLong would be convinced by data that stimulus is needed. It's not clear that Krugman and DeLong are actually at odds over the facts: DeLong doesn't believe that stimulus is necessary now, though he could be persuaded later, he doesn't like fiscal stimulus, which means the most minimal of plans would be best in his viewpoint, and he's concerned that Congress would load up a more complex bill with more pork. Krugman is more liberal than DeLong, and it is not surprising that DeLong prefers the least liberal of the stimulus packages. That does not mean, a priori that he's wrong.
However, I believe that the current exchange rate to the dollar and the price of oil, as well as the structural narrowness of monetary stimulus, do strongly suggest that monetary policy is in a bind. That is, Bernanke lowering rates does as much damage as it does good, precisely because at this moment there is a maw of bad debt out there that will happily suck down any additional liquidity, and produce no stimulus, merely a field of golden parachutes. Thus if stimulus is to be applied, then fiscal policy is a better vehicle than monetary policy.
It seems that DeLong judges Obama's plan differently. All of these plans are acts of campaigning. Obama's plan is last, and it is the most conservative. That's why DeLong, who is not convinced of any need for stimulus yet, likes this plan the most: it arrives later and leaves more to the Fed, and less to Congress. It is also why Krugman, who was convinced of the need for more stimulus earliest, does not like Obama's plan, it arrives later and does less.
On the one hand, DeLong is right that the Fed should have been engaged in policy stabilization, but on the other hand, the time for that is long past; as soon as the Fed failed to act in a timely manner to the housing bubble, the dollar glut and the resources run up, it was inevitable that Monetary policy would reach a stagflationary bind: not much growth, but far too much inflation.
The larger question though is whether stimulus to "get us out of" this economic slowdown is, in fact desirable. That's not clear, it isn't at all clear that the US economy is shifting to an export stance, and that we simply need time to do that. Instead,it seems as if the economy is in the last clutching straws of a housing-health care-homeland security mania, and that buying more time for people who are trying to exit the bubble and run to the Cayman islands isn't really something that policy should be aimed at doing.
Instead of "stimulus" then, a better course would be to have a bill which is specifically "relief". To Republicans relief means tax relief, however, there are many kinds. Relief could be specifically, reducing withholding, with the tax credit to come later, extended UI benefits, increase in food stamps, increasing federal matches of various programs by say 5% - that would mean 1.05 of federal matching funds rather than $1 for specific programs - some debt relief, for example student loans, and suspension of interest on a variety of Federal loan programs.
Another step that Congress could take right now that would do some amount of good, would be to limit interest rates on credit cards and other consumer loans, and temporarily reduce the minimum payment on xredit cards, which was raised not long ago. This would put more money into people's pockets by the expedient of lowering their credit card bills. And people who have credit card bill problems, almost by definition, are people with a marginal propensity to spend. This would have the further advantage of neither being a spending bill, nor being a tax bill. Practically it won't happen, but then, practically a clean tax bill won't happen either.
If we are talking competencies, there are two problems: inflation/devaluation and recession. The fiscal authority, Congress in the US, has just about zero competence to deal with inflation at the present time. That has not always been the case, but it is the case right now.
Thus when faced with two problems that require different policies, the Fed should be sent to deal with inflation/devaluation by keeping rates higher, and that means that Congress needs to engage in stablization. It might be preferable to both remove the overworked piece nature of the Fed, and make Congress more responsible, but that isn't in the cards for the present time.
It should be underlined that recessions are not unmitigated unnecessary evils. They are evils, admittedly. However, a recession the way that the economy tells its participants that they are making bad trade-offs, and that some of the capital is mis-employed. They are the necessary price to pay for the inflationary boom period.
Governments might avoid most recessions if they were willing to both avoid inflationary booms and strong rebounds. But the evidence is that ordinary people make most of their real gains in income during the boom and the rebound, which would mean that ending recessions would also mean a further reduction in the ability of labor to make gains in wages and living standards.
In the last recession, failure to think what would happen afterwards was an essential part of how a borrow and squander binge was passed, and has remained in force despite being about the worst policy on the table - I believe Dr. DeLong's own apt phrase was that Bush's economic policy was from "Delta Quadrant" - a Star Trek reference.
The reason to focus on relief, rather than on stimulus, is that this coming recession can either be severe enough to produce a consensus for change in the economy, or slide through without killing inflationary and devaluationary pressures, assuring another, broader and deeper, recession later when those same pressures must be dealt with by even higher interest rates.
While, in the long run we are all dead, it is best not to take actions which make the long run arrive any shorter than is necessary.
