A Credit Target?

Robert Shiller says we need to rethink our policy targets:

To Build Confidence, Aim for Full Employment, by Robert Shiller, Commentary, NY Times: In the current crisis, discussions of economic policy have often centered on uninspiring, short-term goals. To restore confidence in our economic future, we need appropriate, firm targets that will clearly put us where we want to be.

For example, President-elect Barack Obama has framed his economic stimulus package in terms of the number of jobs he will create. The goal ... to add 2.5 million jobs ... is fine, but it does not represent a commitment to full employment — providing a job for everyone who is willing to work. As a result, confidence remains abysmal.

If the new president had a target of full employment, and if Americans believed that he could reach it, the confidence problem could be quickly solved. ...

[T]here have been some worthwhile targets in monetary policy in recent years. A number of central banks have adopted firm inflation targets... At the moment, of course, inflation is no longer the fundamental risk ... and so we must rethink our targets.

An immediate shift to a full employment target may not be possible, simply because there is no confidence right now that we can hit it. ... In a forthcoming book ... with Professor George A. Akerlof..., we argue that current circumstances call for a couple of intermediate targets. If we can hit them, we may credibly be expected to hit the ultimate target of full employment — and keep inflation at bay. ...

First, there should be an intermediate target for conventional fiscal and monetary policy, one ambitious enough to restore full employment in a typical recession. ...

This target may be inadequate, however, because we are not in a typical recession. Conventional fiscal and monetary methods may fizzle... That is why we also need a second intermediate target, for credit. The ability to borrow should be restored to an appropriate level for a normal economy at full employment.

This is crucial because the most salient problem in our institutions is the drying up of credit. ... For months, the Fed has been working to expand credit, and has invented some good methods for doing so. ... But all the government loan programs announced so far represent only a tiny fraction of the $52 trillion of total credit market instruments outstanding. We will need to go much further and extend credit to households and businesses that would otherwise be ignored.

Along with fiscal and monetary policy, credit needs to be targeted on a scale that would get us out of our current economic mess. That’s what Washington should do now.