Do you believe in the statements below?
First of all, itís very clear that the United States government is not constrained externally, and itís clear that quite apart from the stimulus package, the automatic stabilizers and the financial rescue, which greatly ballooned the public debt of the United States, have had no effect on the ability of the United States government to fund itself and no effect on the interest rates that the government pays.
So, it, I think, follows from that logically and straight-forwardly that we have nothing to fear from additional efforts as long as they are necessary. And theyíre obviously very clearly necessary. So the question is: what should be the structure of those efforts?
Iíve always taken exception to the constant reference to ďstimulusĒ as the policy objective, because implied in that word is the idea that all one needs to do is to undertake one or more relatively short term spending sprees, on whatever happens to be available at the moment, and that this will somehow return the economy to its pre-crisis state, putting it on a path of what economists like to call ďself-sustaining growth.Ē I maintain that in the present environment there is no such thing as a return to self-sustaining growth. There will be no return to the supposedly normal conditions, which were in fact, from a historical point of view, highly abnormal, of the 1990s and 2000s.
What one needs is to set a strategic direction for renewal of economic activity. We need to create the institutions that will support that direction. Those institutions are public institutions, which create a framework for private activity. This is the way it is done. It is the way countries have always developed in the past and, to the extent that they are successful, they will always do so in the future or they wonít succeed. Seventy years ago when we were in the Great Depression, they built a national infrastructure: roads, airfields, schools, power-grids - this kind of thing was the priority. In the post-war period, the creation and maintenance of a large middle class with social security, with medical care, with housing programs, universities - these were the priorities of the post-war period.
Now we clearly face an enormous challenge with energy and climate. Itís a challenge that requires us to think in very creative ways, in very ambitious ways about how to change how we live, so as to make life on the planet tolerable a century or two centuries hence. This is a huge challenge. It requires design, planning, implementation, something with enormous potential for providing employment because things have to be done, enormous potential for guiding new public and private investment because one has to provide people with the means of making it realistic for individual activity to support this larger objective. And that is the way to move toward a renewed economic expansion. This strikes me very far from being a stimulus proposal. It is a proposal for setting a new strategic direction for the economy and doing so over a relatively long time horizon with a view that youíre sustaining effort for 15, 20, 30 years. Thatís the way I think you need to think about this.
Just to wrap up a long answer to a short question: Why canít we go back to the pre-crisis period? The answer is that restructuring of the private household debts is an enormous task which necessarily takes a very long period of time. During that time, the pre-crisis pattern of increasing debt will not resume. The asset against which the American household sector collateralized its debt for 15 to 20 years, its housing, has radically fallen in financial value. The houses are still there but you canít sell them for nearly as much as you could have three years ago. And that is a structural impediment to returning to the previous pattern of economic expansion. And that impediment isnít going to be removed in any short period of time for the simple reason that the houses remain there as an excess supply on the market and they remain therefore as a drag on housing prices.
That article is a very involved read. If you're heavy into the hows and whys things in the economy are the way they are, this article is one persons view, but a very insightful one.