The politics of stimulus

Hide behind economics all you like, the job of those running the Federal Reserve will always be political. Even if they pretend that their pronouncements are strictly factual, the political implications are so clear, it is often quite pointless to pretend otherwise. Alan Greenspan was probably the most celebrated practitioner of blathering-on-while-saying-nothing, leaving senators, reporters and the public wishing they had a decoder ring to figure out what the hell he was talking about. But even the God Greenspan was nakedly political when it suited him (e.g., when he publicly worried about how hard it would be to manage the economy if we actually paid off the national debt – so better pass Bush’s latest tax cuts quick!)

So it is with the latest round of speeches from presidents of some of the regional Federal Reserve Banks – Janet Yellen and Dennis Lockhart – saying that interest rates would have to be kept low for a long time to come, and adding that unemployment is likely to stay high for at least another year or two. Never mind whether this is a “jobless recovery,” or no recovery at all (I vote for the second) – it has the very clear implication that we need another stimulus and we need it now. The Federal Reservers have said as clearly as they know how to do that even if the government spends more money, we don’t need to worry about all that borrowing causing higher interest rates because they have decided to keep them low. And have no doubt, they can do that if they want to. So, no worries about crowding out private investment. In fact, more spending could well crowd IN private investment because there will be more people with money to buy stuff and with any luck better infrastructure, etc.

So count this as one more scream out to the Administration that they had better get off their asses and stimulate the economy. As I have said before, they get lots of credit for avoiding the disaster that loomed last Fall. But I can’t help but think that merely avoiding disaster isnt going to do the trick when campaigning for reelection next year. “Things could be much worse” lacks a certain something as a campaign slogan. It takes a long time for a stimulus to work (the last one still has a lot of spending left to get out the door) so Mr. Obama, Mr. Reid and Ms. Pelosi, please don’t take a break after dealing with health care – the Federal Reserve is doing its part but you still have a lot of work to do.

And please, please, don’t whine about how difficult the politics are. If you can’t convince Congressmen to vote for more spending in their districts in an election year then you should just quit trying to pretend you know anything about politics right now.


I teach economics at Cornell University and specialize in macroeconomic policy both in the US and in developing countries. I often travel overseas to do research and consulting in other countries, most recently in Africa and Central Asia. I sometimes wonder how this ever happened, but I guess it is no real surprise after previous careers as a bond trader in the British government bond market, an economist at the World Bank, and a short order cook on the beach in Delaware. My personal obsessions are politics and sailboats so I alternate between being a complete news junkie and being completely unplugged from any media or communications whatever on sailboats wherever there is warm weather. Having grown up overseas in various countries in Latin America I always have a desire to be nearer to palm trees.

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