Tuesday, June 16, 2009

Balancing Deficit Concerns Against the Need for Stimulus

Scott Sumner provides some fresh perspective:

We do need much smaller budget deficits ASAP, but we also need much more stimulus. How do we achieve these two seemingly incompatible goals? With a much more aggressive policy of monetary stimulus we can get faster NGDP growth, and this will reduce fiscal deficits in two ways:

1. The automatic stabilizer part of the deficit will shrink naturally.

2. There will be less need for discretionary fiscal stimulus.

Yet another reason for monetary policy to target nominal income. Read the rest of Scott's post here.

4 comments:

  1. The U.S. Chamber of Commerce has done great work on key issues facing America -- assessing our country's strengths and weaknesses and outlining the public policies we must pursue to succeed in the world economy. I was glad I could help take action on their web site (http://tinyurl.com/nvhah8) with several petitions focusing on everything from the economy and energy to healthcare and legal reform.

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  2. David, Congrats on your credit in the Daily Telegraph....
    Putting Texas State on the map :)
    LCDR Neil Colston
    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5586043/Dont-believe-the-hyperinflation-hype---dare-to-make-cuts.html

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  3. I do have one comment about your article... if the FED can print trillions of dollars and barely have an effect on real money supply, then you have to ask how broken is the banking system? With an ordinary working banking system this would mean a severe debasement of the currency, but the banks simply refuse to restart the "credit engine". How long can this go on before the real economy is a total basket case? What happens if the banks suddenly wake up one day and start levering back up? Can the FED tighten fast enough to prevent an inflation firestorm?
    Truly interesting times, and when you play with a "fake" fiat money system who knows where the laws of illusion end and the actual laws of nature begin?

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  4. Thanks Texan Navy. You raise some good questions. I am particularly concerned about whether the Fed will have the political will to tighten monetary policy once a true recovery does start. I just have a hard time believing the current Fed has the independence to make what could be a politically tough move.

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