OK, David Brooks has what amounts to a reply. I don’t want to get into a tit for tat. But I do want to take on the claim that believing that simple actions can bring big improvements in the economy amounts to belief in magic.
The key point here is the difference between raising the economy’s long-run growth rate, which is very hard, and increasing demand when the economy is operating below potential, which isn’t hard at all.
Look: under normal conditions, when interest rates are well above zero and there’s room for conventional monetary policy to operate, we actually take it for granted that the Fed can produce dramatic acceleration of short-run growth. When Paul Volcker decided in 1982 that the economy had suffered enough, he loosened the reins — and it was Morning in America.
Now, of course,the Fed funds rate is already zero, so Bernanke can’t just slash the rate. But the same logic through which looser monetary policy can produce a rapid economic turnaround now applies to fiscal expansion.
Stroking your chin and saying, well, I don’t believe in magical solutions because experience shows that raising growth is hard sounds serious, but it’s actually silly. It’s like saying that it’s really hard to extend the human lifespan, so it’s foolish to believe that an infection can be quickly cured with a dose of antibiotics.
But haven’t we tried a huge fiscal expansion? No, we haven’t. The ratio of spending to GDP is up because GDP has fallen and safety net programs like unemployment insurance and Medicaid are covering more people — that is, what we’re looking at isn’t stimulus, it’s the consequences of the slump.
The point is that realizing that there’s a lot you can do to reverse a short-term slump isn’t magical thinking — it’s what basic macroeconomics, what we learned through hard thinking and hard experience, tells us. Rejecting all that may sound judicious, but it’s actually an act of intellectual amnesia.