Time for New Thinking on Stimulus

[girl gone mad]

Time for New Thinking on Stimulus
http://capitalgainsandgames.com/blog/bruce-bartlett/1873/time-new-thinking-stimulus

For the last three weeks, my Fiscal Times columns have been focusing on Fed policy. The main reason is that although I think there is scope for additional fiscal stimulus, there is simply no support in Congress for doing more than has been done. Like it or not, those favoring stimulus got one bite at the apple and they didn’t do enough.

With fiscal policy effectively off the table, the burden of further stimulus necessarily falls on the Fed, which still has freedom of action. This may be a blessing in disguise because I have believed all along that monetary policy is at the root of our economic problem. We are essentially suffering from a deflationary recession identical to the Great Depression except about one-third the size.

(snip)

From the beginning of the crisis there have been economists who said that monetary policy was sufficient to stem the deflation and turn the economy around without fiscal stimulus. Just pump up the money supply, they said; that will stem the deflation all by itself and save the country from a destabilizing increase in debt, a lot of wasteful pork barrel spending, and avoid an implicit tax increase via Ricardian equivalence. The problem is that the Fed did increase the money supply a lot. So much so, in fact, that some of the very economists who said that the Fed could end the recession all by itself quickly became alarmed and began warning about imminent inflation.

Of course, there has been no inflation because deflation remains the economy’s central problem. That is because all the money created by the Fed never got spent; it just piled up in bank reserves. I explained this problem in my July 16 column. This was the fallacy of the monetarist view. Monetarists just assumed that increases in the money supply would be spent.

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[jtuck004]

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