from Follow the Money

Too much, or too little

May 27, 2009

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Free exchange is worried that the Obama Administration wants to change too much:

WHEN asked my assessment of the government’s handling of the financial crisis, I usually say it is too soon to tell. But I am very concerned it is doing too much, too soon and too fast. Their current agenda (not even an exhaustive list): fix financial markets, boost aggregate demand, set up a new regulatory framework, decide how much bankers should be paid, create a market for green technology, repair infrastructure, repair schools, and fix entitlements. That would be ambitious for God to achieve, even given eight days, let alone mere mortals.

Simon Johnson is worried that the US is doing too little, and thus won’t make the kind of fundamental reforms that the United States needs:

"The financial crisis is abating - although the economic costs continue to mount and new problems may still appear (ask California or Ukraine). At least among the people I talk with on Capitol Hill, there is a very real sense that business is returning to usual; certainly, the lobbyists are out in force, they want what they always want, and it’s hard to see many of them as seriously weakened. How much progress have we made on any of [Rahm] Emanuel’s priority areas or, for that matter, along any other public policy dimension that was previously stuck? The charitable answer would be: this is still a work in progress and you cannot expect miracles overnight. True, but Rahm’s Doctrine .. says that you should implement irreversible change while you still have the chance. Tell me if I missed something, but has there been any breakthrough of any kind?"

A lot of current economic policy debates seem to have a similar character.

The debate over US monetary and fiscal policy, for example.

Is the US macroeconomic response to the crisis too modest (in part because nominal rates cannot go below zero), putting the US at risk of sustained deflation and a prolonged period of subpar growth? Or is it too aggressive, and thus creating a major risk of inflation?

The debate over bank recapitalization too.

Too much stress-testing (i.e. forcing healthy banks to raise expensive capital they don’t need to cover losses that may not materialize) or too little stress testing (i.e. tests that weren’t stressful enough)?

The debate over global rebalancing. Has too much has already happened, too fast (the US trade deficit was under 3% of US GDP in q1), reducing the priority on policies to reduce imbalances further? Or has too little fundamentally changed, leading to a real risk that the US fiscal deficit will substitute for the US household deficit, keeping the trade deficit up as Asia returns to exchange rate management?

And of course, the debate over China’s ongoing willingness to finance US deficits. Has so much changed that China will no longer buy US bonds as it seeks to diversify its reserves, forcing the US to adjust? Or or has nothing really changed, as China still pegs tightly to the dollar?

More on:

Emerging Markets

Economics

Financial Markets

United States

Budget, Debt, and Deficits

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