Stimulate, then be patient
It has been an eventful week in the economy. While we have been writing back and forth, the House of Representatives and the Senate Finance Committee both passed fiscal stimulus bills in the neighborhood of $150 billion and the Federal Reserve cut rates by another half-point, bringing the total rate cut since September to 2.25% the largest such reduction in more than two decades. At the same time, the economic news has fallen short of even the pessimistic predictions. On Wednesday, we learned that GDP growth in the fourth quarter of last year was a disappointing 0.6%. On Thursday, we learned that real per capita personal income has fallen since August (yes, Steve, the same day you wrote that personal income was at an all-time high it seems you forgot to adjust for inflation). And today we find out that the payroll survey shows the economy lost 17,000 jobs in January (although the unemployment rate, calculated by a different and less reliable survey, ticked down slightly).
Although predicting the future is notoriously difficult, it is hard not to be much more worried about the economic outlook than we were six months ago. The good news is that the rate cuts will have a big effect on the economy leading economic forecasters are predicting that the rebate checks and other stimulus measures will add about 0.7% to real GDP. The bad news is that most of the benefits will not be felt until the second half of this year.
That has an important implication for policymakers trying to answer today's question: "What if the stimulus package does not work?" The biggest implication is that we will need to be patient. Even reams of bad economic data over the next six months would have little bearing in trying to understand the efficacy of the stimulus package or the need for another one. We would not want to be like the person who turns up the thermostat and then, without waiting for the temperature to rise, turns it up even further until eventually her home is overheated.
The second-biggest implication is that policymakers need to be vigilant about responding to rapidly evolving conditions. The Federal Reserve, with its technical expertise, political independence and flexible policy instrument, is the entity most capable of monitoring and flexibly responding to rapidly evolving developments. Although fiscal policymakers appear to have gotten it right this time, in some ways it was a fluke that cannot be counted on to happen again. The Federal Reserve, for example, can make large preemptive rate cuts and then tighten if needed. It is impossible to imagine fiscal policymakers taking back fiscal stimulus if it is no longer needed.
Finally, if the economy is still weak toward the end of this year and the Federal Reserve has run through most of its ammunition by cutting the federal funds rate to something like the 1%, then we should think about another round of fiscal stimulus. But I am hopeful it will not come to that.
When the economy does start growing more strongly again, we should use that as an opportunity to focus on some of the long-run growth issues you raised in previous posts. We should also focus on reforming unemployment insurance, health insurance and taxation in ways that automatically reduce the severity of business cycles and, more important, cushion families from some of the worst downsides of those business cycles.
Jason Furman is a senior fellow and director of the Hamilton Project at the Brookings Institution. He served as a special assistant to the president for economic policy from 1999 to 2000.
Nothing extraordinary about housing
I think you quite entirely missed my point Thursday.
The question was: "What's wrong with this economy?" My answer was, "The same things that are always wrong with it. Nothing more than that."
You replied that my answer can't be right because the things that are always wrong overspending, overregulation and inefficient taxation have been relatively constant and therefore can't explain extraordinary problems.
Jason, that was exactly my point. There are no extraordinary problems to explain; therefore there's no reason to think that anything extraordinary is wrong.
As always, some things are up and other things are down. Disposable personal income was up last month by about the same amount that it was down in November. (You're correct about the "all-time high" statement Thursday.) Reported unemployment is up though we should view these figures with some skepticism because claims for unemployment benefits are actually down. Foreclosures are also up; some people are losing their houses. That can be sad, but it's not a systemic collapse of the economy.
Let's talk a little more about what those foreclosures mean. Every lottery winner wishes he'd won the Powerball jackpot instead. That doesn't mean the rest of us should be taxed to compensate lottery winners. Getting to live in a nice house for a few years, thanks to sub-prime lending, is like winning the lottery; getting to live in a nice house for the rest of your life is like winning at Powerball. The lottery winners who are now losing their houses deserve our sympathy insofar as they mistakenly expected a bigger prize than they got, but let's remember that they're still net winners.
The losers are elsewhere. Too many resources were devoted to housing, so too few resources were devoted to other industries. That's a real loss, and it's sad; but it's in the past, not the present.
So I'm not convinced there's anything especially wrong right now. Even if we do head into a significant downturn and you're right that the recent growth numbers are anemic the reasons remain pretty clear: We're making some painful, necessary, temporary adjustments in the wake of the realization that we've built too many houses. Painful? Yes. Extraordinary? No.
If we focus on trying to smooth out the ups and downs of the business cycle, we cannot simultaneously focus on fostering long-run growth. Long-run growth is what lifts people out of poverty and lets each generation live by standards that were unimaginable to their grandparents. It deserves our full attention.
Steven E. Landsburg is a professor of economics at the University of Rochester and the author, most recently, of "More Sex is Safer Sex: The Unconventional Wisdom of Economics."