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Range and punch of anti-stagnation tools should be increased

In the New York Times’s Dealbook column, macro issue as Justin Wolfers attempts to make a case that a re-do of the policy arsenal is in order. While the employment situation is vastly improved, policymakers won’t be able to count on Fed rate cuts to rescue the economy next time, given low post-crisis “settings” of this instrument. We agree that increasing the punch of automatic stabilizers, etc., on the fiscal side has long been in order—though long out of fashion in mainstream academic macroeconomics. While I do not find myself in agreement with Wolfers in every detail–a rarity for me in any event–his call seems appropriate.

I might add that it might help to think more about a role for exchange rate policy. A real devaluation of the currency probably works on balance to stimulate the domestic economy in a country with reasonably strong export industries and in an advanced state of economic development. The United States is no exception. Of course, moderation in such moves is  important, given the frequently echoed point that costs for big retailers are adversely affected. Since public and private sector deficits add up to the financial balance with the rest of the world, it helps in the current US context to take action to reduce the latter, along with other anti-recession moves. Many options exist in Washington that might help a U.S. administration work directly on trade deficits legally—including use of the little-discussed Treasury Department foreign-currency fund. Currently on the Congressional agenda is the “border adjustment tax,” a broad incentive-based approach that works by increasing corporate taxes on imports relative to those on imports. The effects of such a change and the principle behind it are similar to those of a devaluation of the dollar. (See this Times column for a sympathetic analysis.)

Another point in favor of fiscal stabilizers is that they can be chosen to work directly on employment, rather than by a chain of events that cannot be counted on. For example, lower rates may fail to increase private-sector spending, and private-sector spending may generate debt bubbles or enlarge the trade deficit beyond the tolerance of the electorate. In contrast, fiscal stabilizers can be enacted that hire the unemployed or feed the hungry.

The Fed as the sole party responsible for macro policy remains oversold and the public a bit complacent.


We have from time to time been doing some humble Keynesian analysis of the issues in international economics raised by Washington’s moves on trade, exchange rates, etc. In Dissent, a cerebral opinion journal of the US democratic left, heterodox economist Josh Mason argues that nationally centered policies and a retreat from efforts to cooperate in economically unified zones may make sense for progressives.

Josh makes the relevant point  that some developing world issues regarding exchange rates and trade have  to do with  regular payments of debt and the like for countries that  tend to stay in debt to the U.S. or other industrialized powers. A strengthened dollar or any other change that has a  similar effect on the relative prices of imports and exports tends to have a recessionary effect in developing countries that stand in such a relationship the United States. Right now, Mexico alone among emerging economies has more or less reversed early post-election devaluation against the dollar; others with debt to the U.S. face a contractionary effect following the recent dollar rally that might be offset by real devaluation–resulting in a win-win outcome with with respect to many relatively poor economies. Again, the point is that U.S. use of instruments other than the federal funds rate and quantitative easing could be of great utility in a world with high global unemployment rates.

We have mentioned Josh’s interesting blog here before.

Finally, Gregor Semieniuk points out in a group email that this heterodox micro textbook is now free on the worldwide web. It is John Broome, The Microeconomics of Capitalism. Beyond very basic high-school math, it requires some knowledge of linear algebra—matrices, etc. This material is reviewed in an appendix. Thanks to Gregor for the pointer.





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