July 25, 2011
Robert Samuelson gave one of his standard diatribes against the welfare state today. He told readers:
“They [economists] seem to have exhausted conventional policy approaches. Central banks such as the Federal Reserve have held interest rates low. Budget deficits are high.”
Let’s see, we had about $300 billion in annual stimulus to offset a $1.3 trillion drop in annual demand due to the collapse of the housing bubble. Conventional policy approaches say that this is nowhere near enough to bring the economy back to full employment. The best analysis of the stimulus concluded that the impact was actually slightly larger than predicted. (This requires adjusting the in-state multipliers measured in the study for the fact that there is inevitably spillover. For example, spending in New York will create jobs in New Jersey.)
Central banks certainly have not done all they could to boost the economy. The European Central Bank never lowered its overnight rate below 1.0 percent and has recently raised it to 1.5 percent. The Fed could have tried targeting a long-term interest rate or even a higher inflation rate.
Given the limited policy response to the collapse of the housing bubble, it is not clear why Samuelson would have expected more of an impact on growth and employment. His view certainly is not based in conventional economics.
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