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Thursday, May 17, 2012

Are You Feeling Lucky?

Give all the uncertainties about Europe, and additional worries about other things such as oil prices, if we could buy insurance against future economic problems, now would be a good time to do it.

Oh wait, we can. That insurance is called monetary and fiscal policy. Like all insurance it does come with some cost, and yes -- again like all insurance -- there's a chance we won't need it. But if we bet against the car wreck and it happens anyway -- and the odds of collateral damage from a wreck in Europe are high right now -- we'll be sorry.

Keep in mind, too, that some forms of insurance don't have to be very costly. In fact, in some cases the benefits could outweigh the costs even if Europe, oil prices, etc. do not turn out to be problems. What I have in mind is infrastructure spending. Infrastructure spending gives us the extra demand we need to provide insurance against a shock to demand from Europe, etc. And we could use the extra demand in any case given the high level of unemployment right now, so there are benefits even if the insurance is not needed. Thus, there are benefits on the demand side no mater what happens.

But infrastructure spending also has important supply side effects. Improved infrastructure would enhance future growth (and the additional jobs the spending would generate would help to prevent permanent losses to the economy associated with long-term unemployment). The higher growth alone yields benefits to the economy that exceed the cost of the investment (costs that are extraordinarily low due to rock bottom interest rates), and when the deamnd side/insurance benefits are added in, it seems to be a no-brainer. Unfortunatley, there are far too many "no brainers' in Congress right now to allow such sensible policy to go forward.

    Posted by on Thursday, May 17, 2012 at 10:04 AM in Economics, Fiscal Policy, Monetary Policy | Permalink  Comments (18)


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