Want to Fix the Economy? First, Remember That It Can Be Fixed
It's not over, folks. Fine, so the economy is coughing blood, jobs are scarce and elsewhere in the world dogs have taken to devouring their masters. Consumer confidence lies somewhere between "glum" and "kill me now."
But while such pessimism is understandable, it's important not to let a sober appreciation of the nation's economic challenges blot out another reality -- there is something we can do. That's been easy to forget in recent months. Empty stores. Credit downgrades. Robo-signers. In Washington, the dark comedy of Republican lawmakers taking the country to the brink of default over... well, you'd have to ask them.
But cynicism is different than impotence. One thing President Obama got right in his address to Congress last night -- right because it happens to be true -- is that there is much government (meaning, we the people) can do to reignite the economy. Just as the financial crisis was "man-made," so are the policies that can restore growth and put the U.S. on sounder financial footing.
As proposed under the American Jobs Act, one way to do that is to rebuild the nation's aging roads and bridges. Another is to help homeowners facing foreclosure refinance their homes. Payroll tax cuts may help, too, if perhaps not as much as other measures.
Job-killing ideas
For good ideas to see the light of day as public policy, however, these something else has to happen -- bad ideas have to go away. As economist Joseph Stiglitz notes, one such myth is that slashing government spending will save the economy. It won't. If it could, as austerity bites cities and states nationwide, then growth should be speeding up instead of stalling out. And if spending cuts were the answer, then European countries that are furiously swinging an axe at their own budgets should be on the road to recovery rather than descending into financial chaos. Besides, American history is abundantly clear on the risks of prematurely withdrawing fiscal stimulus following an epic financial crash.
Here is another idea that needs to die, Stiglitz says, and the sooner the better:
The second myth is that the stimulus didn't work. The purported evidence for this belief is simple: Unemployment peaked at 10 percent -- and is still more than 9 percent. (More accurate measures put the number far higher.) The administration had announced, however, that with the stimulus, it would reach only 8 percent....
Without the stimulus, however, unemployment would have peaked at more than 12 percent. There is no doubt that the stimulus could have been better designed. But it did bring unemployment down significantly from what it otherwise would have been. The stimulus worked. It was just not big enough, and it didn't last long enough: The administration underestimated the crisis's durability as well as its depth.Digging deep
A third myth is that the Federal Reserve is out of ammo for fighting the slump. No. The central bank has other tools it can use, including targeting a longer-term interest rate, trading a little inflation in return for faster growth and injecting more money into the economy through quantitative easing. Indeed, the Fed is considering its options now, suggesting that Ben Bernanke sees more levers he can pull.
If we're looking for panaceas, of course, they won't be found in any single monetary or fiscal measure. The hole in the economy is very large -- roughly $1 trillion in terms of output gap -- and filling it will require government and business to wield many shovels. And as always politics will constrain whatever solutions are proposed. But it doesn't have to snuff them out -- not if we don't let it.
Related: