Thursday, December 04, 2008

Who wants to be a trillionaire?

Lots of different economists, apparently.

Greg Mankiw spins a nice yarn:

Not all economists think fiscal stimulus is the answer to the economy’s ills. “There are other choices,” said Greg Mankiw, a Harvard professor who served as President George W. Bush’s chief economic adviser. Foremost among the alternatives is monetary policy, said Mankiw. The Fed can act to bring down long- term interest rates as well as short-term ones, he said.

Umm, Greg, short-term rates are already almost at zero--nowhere else to push. And last time I checked, the market determines long-term rates, and for a long time no one but sovereigns have wanted in the market for US long-term debt. Historically, long-term rates are still pretty low, and they are so at the benevolence of sovereign investors.

So how might the Fed act to bring down long-term rates, in Mankiw's view? Mankiw's interjection is a subtle way of staking out an anti-stimulus position in the recession policy discourse. My inkling is that, in so saying, Mankiw has the following in mind. In 1992, Fed Chairman Alan Greenspan (along with Rubin and a cast of other characters) snookered the incoming Clinton Administration into putting balanced budgets before ambitious democratic social policy goals. A balanced budget, it was argued, would reduce long-term interest rates and thereby speed growth such that those policies could be "afforded" some time later down the line (you know, if this budget-growth scenario played out). And as we know, our dreams of national health care were abandoned at the altar.

Any economist worth his or her salt knows, though rarely will admit publicly, that "balanced budgets" is a more useful political than economic concept. Mankiw knows this, too, and has not been much of a budget-balancer in his research, or as head of Bush's Council of Economic Advisers. However, he finds the argument useful to employ against the tax policies and social programs he ideologically opposes. And he is subtly urging Ben Bernanke to pick and use a similar bludgeon against the incoming Obama Administration to tamper its ambitions for "change." Hmmm, that sounds sorta familiar. Of course, its quite glaringly hypocritical. Bernanke has been burning through cash faster than a coked-up Paris Hilton on a Las Vegas weekend bender. But the Democrats are the ones who should show restraint.

It's hard to believe this guy has the best selling economics text books. Remember, he told us that McDonald's fry chefs should be classified as manufacturing jobs.

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