As you know, I have been back pedalling on my support for fiscal stimulus since late in 2009. I still think fiscal policy is effective – more so than monetary policy; quantitative easing is a bust because we are in a liquidity trap. But the allocation of government money has been politically motivated and wasteful.
I know this is a curious way to lead into a post on job guarantees; however, having witnessed the economic strategy of the Obama administration, my position is that government is captured by special interests. Any stimulus will simply go to prop up the poor stewards of capital which created this mess. This is certainly what we have seen thus far regarding the housing industry, the banking industry and the auto industry.
Where you want government to focus is jobs. We have nearly 17% underemployment. Gallup measures underemployment at over 18%. John Williams at Shadow Stats measures unemployment as over 22%. These are depressionary figures, folks. That’s why I see this whole debate about stimulus as misguided and what accounts for my cryptic remarks at the end of my Sovereign Debt Crisis post.
When you see government focused on whether to go for more stimulus or run with austerity as some sort of fix, you know it is just kicking the can down the road. The right approach would be to focus on the lost output from the massive unemployment we are witness to. Much of this is structural. Much of it is not.
The real issue is jobs. I happen to agree with the likes of Arnold Kling that the much of this is about recalculation. Many of us invested our lives in sectors of the economy that are permanently shrunken – housing, financial services, autos. If the federal government wasn’t trying to prop these sectors up artificially, the carnage would be that much worse. Question: does the government’s interference lengthen the process? I say emphatically yes.
However, I am not a card-carrying member of the flagellanti. I still think you can do something about the problem. I recognize the need to put a floor under the employment situation. I like what Marshall is talking about in the video below a lot more than what we have seen from the Obama Administration. This is what I have called Unemployment insurance for the 21st century and Marshall made similar points in a post earlier today. I don’t think this will get rid of the problem, though. Similar programs in Germany show that this is no panacea. Recalculation takes time. At a minimum, this modified unemployment insurance would close some of the output gap.
(video embedded below – I love those pinstripes)
One last word here. I prefer fiscal policy over monetary policy. Interest rates are a blunt instrument. Permanent Zero, where we are now headed unless the Fed prints enough money to replace private credit, is toxic. For me, it is clear that easy money in the form of both excess liquidity and low rates leads bond market participants, many of whom have nominal rate targets in mind, to reach for yield. It is clear to me that retired investors rolling over fixed income securities must also reach for yield and risk if they want to secure a decent return to live on. It is clear to me that leveraged finance professionals pile into acquisitions when rates are low because the extra leverage they can get is like free money.
There have been a lot of people denying the centrality of low interest rates to creating the bubble. These people obviously have never worked in the capital markets. If they had, they would have seen what low interest rates do to animal spirits and risk-seeking.
P.S. – Hat tip to Scott Frew for introducing me to the term flagellanti!.