Economists aren't too hot
on the success of the last decade, and are now raising questions about whether the next one will be better. Will the American economy recover, or are we in for
rough years of instability, stagnation, or crisis? Will the Fed start to raise interest rates again in
anticipation of recovery? Will new regulatory reforms prevent a
repeat of the housing and financial crises? The annual meeting of the
American Economic Association this week is giving top economists and
policymakers a chance to take a crack at these puzzles. Here's what they see coming:
- Rough Ride Ahead--Don't Pull Stimulus Yet In The New York Times, Paul Krugman
continues his rebuttal of "bullish commentary--and the calls we're
already hearing for an end to the stimulus." He warns the Fed and Obama
administration against "repeating the great mistake of 1937, when ...
spending was cut back, monetary policy was tightened--and the economy
promptly punged back into the depths."
- The Role of the Fed Worrying over the regulatory failures that
helped lead to "a deep global recession from which we are only now
beginning to recover," Fed chairman Ben Bernanke says that while
"financial regulation and supervision" are not necessarily "ineffective
for controlling emerging risks, ... their execution must be better and
smarter." He argues that monetary policy is, compared to regulatory
policy, "a blunt tool" for controlling the economy. "Clearly, we still
have much to learn about how best to make monetary policy and to meet threats to financial stability in
this new era. Maintaining flexibility and an open mind will be
essential for successful policymaking as we feel our way forward."
- We'll Have to Tighten Before Full Recovery While Krugman remains
concerned at the prospect of the Fed raising interest rates too soon,
Fed vice chairman Donald Kohn argues in his address that "we will need
to begin withdrawing extraordinary monetary stimulus well before the
economy returns to high levels of resource utilization," and says they will rely on forecasts. Though asserting that the Fed has "no
shortage of tools" for aiding economic policy, he echos Bernanke's
it is well to remember that we are still in uncharted waters.
We do not have any recent experience with financial disruptions of the
breadth, persistence, and consequences of those that we have
experienced over the past several years. And we have no experience with
most of the sorts of actions the Federal Reserve has taken to counter
the shock. The calibration of our exit from these policies is
complicated by a paucity of evidence on how unconventional policies
work. We will need to be flexible and adjust as we gain experience.
- Full Recovery in Next Decade, with Difficulties Harvard economist and Reagan economic adviser Martin Feldstein, while not denying the "serious cloud over the near-term economic outlook" says he "will make the plausibly optimistic assumption that the economy will fully recover over the next ten years." He predicts that growth in output will get an extra boost from economic recovery, though that will be "offset by the likely effect of the falling dollar and the shrinking trade deficit." That means the economy will grow, in the next ten years, at about the same rate as it did in the past ten years, although he also predicts slower growth of capital accumulation, "multi-factor productivity," and the labor force.
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