A Grinding Recovery, and How to Speed it Up

by Pejman Yousefzadeh on November 4, 2011

80,000 jobs created. A drop in the bucket. I don’t think that it even does much to keep pace with population growth. Oh sure, the unemployment rate droped by a tenth of a point, but it is still at 9%. As the story indicates, to bring the unemployment rate down by half a percentage point, we need to be creating 150,000 jobs a month, and we are not even close to doing that.

I suppose that it is timely for me to note this piece by David Beckworth and Ramesh Ponnuru, arguing that to properly goose the economy, we need to rely not on fiscal stimulus which could drive up the deficit, but rather, on monetary stimulus. I have believed this to be the case ever since I read this editorial by Robert Lucas back in December of 2008, arguing in favor of monetary stimulus driven by the Federal Reserve. As Beckworth and Ponnuru point out, the Federal Reserve can continue to implement monetary stimulus policies even in an era of zero interest rates. Inflation is not an issue; the inflation rate has been very low for a number of years, and as the authors indicate, the bond market predicts that the inflation rate will continue to remain low. Even if the inflation rate goes up, that may be exactly what the economy needs in order to get rid of a serious amount of debt overhang that continues to plague the economy.

Note that the idea to increase monetary stimulus has provenance on the center-right. And of course, the late, great Bill Niskanen was not the only person on the center-right to argue in favor of monetary stimulus in a recessionary, or slow growth period; if Milton Friedman were here, he would be arguing for monetary stimulus as well, and would look favorably on the idea for a third round of quantitative easing by the Federal Reserve. Monetary stimulus is needed to balance out against budget cuts that are aimed at reducing the deficit, and to meet the demand for money balances, which Beckworth and Ponnuru note has “surged.”

Of course, the prospects are poor that the Federal Reserve is going to do more in order to encourage economic growth, because the Ron Paul types have hijacked monetary policy in the Republican party, and other Republicans do not know enough, or care enough about monetary policy to challenge them. And the Democrats aren’t doing anything to provide the Federal Reserve much cover either. We continue to be stuck in a bad place economically, and the political situation is not helping us find a way to stable and significant growth.

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