[I am going to start reposting entries from my Maximum Utility blog a few days after they are posted at MoneyWatch. This one is a bit older than that, and it was first noted here.]
What Economic Policies Should Government Pursue During the Recovery?, Maximum Utility: Now that the economy appears to be turning around, how should the
government react? What types of policies are needed for the recovery
1. Things look better now. Almost all economic indicators are
beginning to point upward, but we don't know yet if the recovery will
be strong or weak, or if we might be headed for a double dip. For that
reason, don't pull back on monetary and fiscal stimulus too soon. It
will be tempting to listen to the deficit and inflation hawks as things
start to improve, but it's important that the stimulus not be
withdrawn before the economy can stand on its own.
2. If the recovery seems to be very slow or stagnating, don't be
afraid to give the economy the additional help it needs. Output is
starting to grow, but labor markets are lagging behind. It's not yet
clear if the lag will be as large as in the previous two recessions,
but it's certainly something to keep an eye on.
3. Similarly, there is a huge jobs backlog -- millions and millions
of people have lost jobs during this recession -- and it will take a
considerable amount of time to reemploy these workers even under strong
labor market conditions. Workers will still need unemployment
compensation, help with health care, and other social services until
they can find work. They are not lazy or playing the system, it's just
that the applicant to jobs ratio will remain high until the backlog is
cleared, so don't cut them off too soon.
4. If the government does try to take an active rather than a passive
role in the recovery, try to anticipate what the post-recession
economy will look like and help with the adjustment. For example, there
is lots of structural unemployment due to the scaling down of the
housing and financial industries. Where will these workers go and what
can the government do to help them get there? Will we need to rely upon
exports to a greater degree than before the recession in order to
maintain robust growth? If so, what can the government do to help this
sector to develop? I don't mean the the government should try to manage
the economy with a heavy handed industrial policy approach, but when
it's clear that change is coming to a particular sector, then the
government should do what it can to help (or at least get out of the
5. As the economy recovers, it will be easy to forget about the
problems we had and what caused them. Don't let exuberance over the
recovery get in the way of making the changes that need to be made to
try to prevent this from happening again. All of the promises to do
better that are made when things are really bad are easily forgotten
once things improve.
6. When the time comes -- but not a moment before that -- policy must
be reversed. The fiscal policy measures involving both government
spending and tax cuts were sold as "targeted, timely, and temporary."
We could have done better at the targeted and timely part, but it's not
too late to make it temporary. It will be difficult to cut the
stimulus once it's clear that the economy has recovered, there will be
an outcry about the jobs that will be lost, the decline in growth,
etc., but it's important that we do it. First, there are theoretical
reasons to believe that temporary fiscal policy has a much larger
effect than permanent changes within modern, New Keynesian structures.
Second, we may need fiscal policy again someday. If we don't keep out
promises and reverse the spending and tax cuts, the next time fiscal
policy is needed nobody will believe that will actually be temporary no
matter what is promised, and that will make it much more difficult to
pursue the policy that is needed.
Update: 7. State and local governments are still having
trouble, and are likely to continue to struggle at least through the
next fiscal year. If they don't get more help, this create a big drag on
This is surely incomplete. What else should be on the list?