Over at Project Syndicate: Try Everything

Over at Project Syndicate: Try Everything: When it became clear in late 2008 that the orgy of deregulation coupled with global imbalances was confronting the global economy with a shock at least as dangerous as the Great Crash that had initiated the Great Depression, I was alarmed but hopeful. We had, after all, seen this before. And we had models from the Great Depression for how to mitigate the damage–basically, try everything that might work to boost demand and production and reduce jobless workers, and reinforce success.

In the United States, for example, after 3 1/2 years during which Herbert Hoover had focused on restoring business confidence via balancing the budget, in 1933 the new President Franklin Delano Roosevelt tried everything: abandoning the gold standard, monetary reflation, deficit spending–at least to the extent of no longer making budget-balance an immediate priority–direct employment by the government, government loan guarantees, corporatist industry-level cartelization, aggressive antitrust policy to break up monopolies, and yet more. These policies sometimes conflicted with each other. A serious chunk of them were counterproductive. But Roosevelt tried everything, and reinforced success, and in the end the United States economy was much healthier than those that had remained with the Gold Bloc.

Thus in late 2008 the correct policy course appeared to me to be obvious: Recapitalize banks? Yes. Guarantee loans? Yes. Use Fannie and Freddie to resolve underwater mortgages? Yes. Drop short-term interest rates to zero? Yes. Engage in quantitative easing? Yes. Deficit spending? Yes. Change the regime of monetary policy-making so that businesses and savers would be confident that their previous expectations would be validated and the economy would not suffer from deflation or lowflation? Yes. And then, as events evolved, reinforce those policies that seemed to be working, and gradually drop those that seemed to be ineffective or counterproductive.

Yet that was not what we did. There was a remarkably large amount of root-and-branch opposition to different possibly-helpful policies: Recapitalizing the banks would simply reward institutions and executives who had caused the problem, and generate moral hazard and more problems with the future (alas, an objection that had a point–even though big bank shareholders lost 80% of their wealth in the crisis). Resolving underwater mortgages would reward feckless borrowers who ought to be punished. Expansionary fiscal policy was, logically, Ineffective by necessity. Expansionary monetary policy could only produce inflation and not recovery. Expansionary fiscal policy would do more harm because higher debts would reduced confidence than good by encouraging spending. Quantitative easing would, somehow, generate a new financial crisis. As near as I can see, all of these arguments could not and cannot be made with a straight face by people who had done their intellectual homework. But they were and are made by many.

But perhaps more damaging and more decisive in producing the grossly inadequate response two 2007-2009 that we have seen were those advocating their favorite stimulative policy at the expense of other policies. “Don’t do deficit spending–resolve underwater mortgages!” “Don’t do expansionary monetary policy–fiscal policy can do the job!” “There’s no need to raise expectations of future inflation–recapitalizing the banks is what is really needed!”

And we saw the latest of these the day after Christmas in the Wall Street Journal, with the extremely sharp Martin Feldstein’s “The Fed’s Needless Flirtation with Danger” http://www.wsj.com/articles/martin-feldstein-the-feds-needless-flirtation-with-danger-1419543510. The demand-stimulative policies advocated–investment tax credits, changing deductions to credits focused on increasing incentives to invest, shifting corporate tax burdens to those with low rather than high marginal propensities to spend–are all promising. They belong in the “try everything” basket.

But then there is the surrounding rhetoric.

It starts with the headline: “The Fed’s Needless Flirtation With Danger”. It continues with claims that the Fed’s policies “increase the risk of financial instability…”; that his recommended policies are a “safe and effective alternative”; that they are not an additional arrow in the quiver but rather replacements for “traditional Keynesian policies… [that] increase… national debt”.

The net effect, in my view at least, is at best a zero. Rather than having the effect intended of pushing us toward more effective demand-stimulus policies, the real-world effect is to diminish support for those demand-stimulus policies we are now undertaking without successfully assembling a coalition that can flick the switch and get us to undertake policies that we are not.

And when I look back at everything I have written since 2008, I find that I am also part of the problem. I find that I, too, have been too cocksure that my favorite policies recommended by my favorite theories have been the ones to push. And I have been insufficiently respectful of the wisdom of Franklin Delano Roosevelt, that:

The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something…

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