new america foundation
Our economic straits are rendered all the more dire, andthe just mentioned scenario accordingly all the more likely,by political dysfunction and attendant paralysis in both theUnited States and Europe. The political stalemate is in partstructural, but also is attributable in significant measure tothe nature of the present economic crisis itself, which hasstood much familiar economic orthodoxy of the past 30years on its head. For despite the standoff over raising theU.S. debt ceiling this past August, the principal problem inthe United States has not been government
action. It hasbeen
action, proceeding on inadequateunderstanding of what ails us.Since the onset of recession in December 2007, the federalgovernment, including the Federal Reserve, has undertakena broad array of both conventional and unconventionalpolicy measures. The most noteworthy of these include:slashing interest rates effectively to zero; two rounds of quantitative easing involving the purchase of Treasuriesand other assets, followed by Operation Twist to flatten theyield curve yet further; and three fiscal stimulus programs(including the 2008 Economic Stimulus Act, the 2009American Recovery and Reinvestment Act, and the 2010Tax Relief, Unemployment Insurance Reauthorization, andJob Creation Act) and the 2008Troubled Asset Relief Program torecapitalize the banks.These actions have undeniably helpedstabilize the economy—temporarily.But as evidenced by continuing highunemployment and the weak andnow worsening economic outlook,they have not produced a sustainablerecovery. And there is no reason tobelieve that further such measuresnow being proposed, including theadditional tax relief and modestspending found in theadministration’s proposed AmericanJobs Act – which look all too muchlike previous measures – will be any more successful.Indeed, there is good reason to worry that most of themeasures tried thus far, particularly those involvingmonetary reflation, have reached the limits of theireffectiveness.The questions now urgently before us, then, are these:First,
have the policies attempted thus far fallen so farshort? And second,
should we be doing
?Answering these questions correctly, we believe, requires amore thorough understanding of the present crisis itself –its causes, its character, and its full consequences.Regrettably, in our view, there seems to be a pronouncedtendency on the part of most policymakers worldwide toview the current situation as, substantially, no more than anextreme business cyclical decline. From such declines, of course, robust cyclical recoveries can reasonably beanticipated to follow in relatively short order, as previousexcesses are worked off and supply and demand find theirway back into balance. And such expectations, in turn, tendto be viewed as justifying merely modest policy measures.