Monday, March 4, 2013

Sometimes bad ideas lead to bad results

Sequestration!? Okay, it is a truly awful name for a masterfully awful policy! Members of Congress came up with an elegantly ingenious idea: we can't come up with any compromise that will improve the budget "enough", so let's kick the can down the road and enact automatic spending cuts that nobody would want.

But, apparently, there was one hitch: at least one party doesn't care enough about the budget cuts to do anything about. As Professors Krugman, Summers and DeLong point out, there is really no reason that cutting spending is the best move right now and many rea$on$ to think it's not such a good idea.

Short-term treasuries have near 0% interest rates and longer-term treasuries haven't got appreciably higher rates... And inflation is still not zero, so basically people are paying the Federal Government to borrow their money, in real terms. Even this, however, is not enough to bring about full employment in any reasonable timeframe (it isn't even apparent that we are converging back on what it seems like it should be).

Conventional monetary policy doesn't have any traction, forward guidance, such as it is, doesn't seem to do enough. Maybe NGDP targeting could help (although it seems it would have to be primarily from forward guidance which may not work as well as advertised) and maybe currency depreciation could do something, but why not try another strong(er) dose of fiscal stimulus? My thought is to provide more assistance to the states, invest more in infrastructure (modernized ports, public transport, wireless and broadband, smart grids, green power, better schools and hospitals, improved roads and bridges, etc.) and invest more in education.

The national media should really get off this kick about shared sacrifice and start talking about building a shared prosperity for ourselves and our posterity.

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