Bernanke secretly wishing if Fiscal Policy could help…

Alan Blinder as always has a nice article explaining the thinking going on in Bernanke’s mind.

The two main thoughts that are probably going through Mr. Bernanke’s head today are, first, “I sure wish I could get some help from fiscal policy,” and second, “I probably can’t, so I’d better do whatever I can.” He’s right on both counts.

In a more rational world, it wouldn’t be this way. Fiscal policy, which packs the power, would be doing the heavy lifting—by combining tax cuts and spending today with credible deficit reduction for the future. Monetary policy would take the back seat by keeping interest rates low. But we don’t live in a rational world. And as Donald Rumsfeld might have said, you go to war against recession with the army you have. Right now, that’s the Federal Reserve. The fiscal army is AWOL.

He points to three personal favorites fiscal policy measures:

How might fiscal policy speed up growth? As Elizabeth Barrett Browning once said, let me count the ways. Actually, let me not, because there are too many. Here are just three of my personal favorites:

• New jobs tax credit. The government could offer tax breaks to firms that increase their employment above some base level. In fact, Congress did just that with the HIRE (Hiring Incentives to Restore Employment) Act in March. But it was legislated on a pitifully small scale and will expire at year’s end. We need a larger version that stays around for a while.

• Government hiring. The government could hire people directly onto public payrolls, as Roosevelt did with the Civilian Conservation Corps and the Works Progress Administration. These days, many of the new hires would wind up on state and local, rather than federal, payrolls. But the federal government can still foot the bill.

• Cut sales taxes. Slightly more exotically, the federal government could create tax incentives for consumers to spend more now by offering to replace the lost sales tax revenue of any state that will cut its sales tax for, say, the next year.

He believes QE2 will not be much use. First US Treasury market are highly liquid and a few 100s of  USD bn of bond buying will not help. Then even if they lower the bond yields by 30 bps, how will it help? 

Hence, fiscal policy is the best bet but given the political reality, can’t be done. Hence, Bernanke and Fed remains the only choice. 

For more details, read my paper as well

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One Response to “Bernanke secretly wishing if Fiscal Policy could help…”

  1. leaside real estate Says:

    Leaside…

    Bernanke secretly wishing if Fiscal Policy could help… « Mostly Economics…

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