The Long and the Short of It

A number of people have been telling me about David Brooks and Ruth Marcus agreeing that there’s not much government can do about short-run economic performance, that we need to focus on long-run solutions. It’s a common sentiment inside the Beltway.

And it’s also utterly, utterly backwards. Changing the economy’s long-run growth rate is hard. We’ve had almost 25 years of “new growth theory” research, with every possible regression run, looking for the keys to faster growth; my sense is that we’ve basically come up dry.

Meanwhile, policy can have huge short-run effects. Monetary policy for sure, in normal times. In a liquidity trap, that’s harder — but fiscal policy does indeed work, if tried. Bear in mind that every paper showing that fiscal contraction is, indeed, contractionary is also, necessarily, showing that fiscal expansion is expansionary.

Politically, stimulus turns out to be hard to do. But commentators who spread fatalism are part of the problem.