We don't blame you if a sentence like-"Since stabilization policy can shorten the recovery time from a recession, it can also reduce the impact of deep downturns on our long-term productive capacity" don't get you excited. But it should!
The evidence is mounting that poor policy from our elected representatives can do more than slow a recovery, it can also permanently reduce our long term standard of living. Mark Thoma speaks in plainer English than most and provides an excellent synopsis of both the traditional economics narrative and latest developments on the growing consensus.
In The New Supply-Side Economics he writes:
"Traditionally, macroeconomic policy has been divided into two distinct types. The first type, stabilization policy, attempts to keep output and employment as close to their full employment levels as possible. The idea behind these policies is to minimize, or even eliminate, short-term boom-bust cycles around the natural rates of output and employment caused by fluctuations in aggregate demand.
The second type of policy, growth policy, works on the supply-side and attempts to keep the long-term natural rates of output and employment growing as fast as possible. Thus, if the long-term natural growth rate of output is, say, 2.5 percent, supply-side policy would try to increase this rate, while demand-side stabilization would try to keep us from deviating from it, whatever it might be.
Importantly, these policies were believed to be independent. Monetary and fiscal policy used to stabilize the economy could change how fast the economy returns to the natural rate after a positive or negative shock, but the policy would have no impact at all on the natural rate itself.
But what if this is wrong, as data from the Great Recession suggests? What if demand-side policies impact the natural rate after all? What does this mean for monetary and fiscal policy? It turns out to have important implications."
While not surprisingly for us, the recognition of the limitations of bank credit creation to jump start consumer spending enough to support sustainable economic activity continued progress in our direction.
What's changed? In part the financial crisis created a hole we needed to get out of and the tradition narratives proved either ineffective or inaccurate. Many failed to account for the strength of government inputs or stabilisers. That we've seen a continual drop in the % of the population in the work force not provide a significant drag is important. Charitably, others were in the pocket of banks so unwilling to let the fiscal cat out of the bag. Probably not a stretch to suggest many of those in finance are now actively prodding this conversation with the knowledge of its requirement - who would know better than banks the importance of government support.
Will this finally translate into action from our elected officials? Not likely the US House is busy passing legislation to put a fence around the Federal Reserves ability to support the economy anyway. Besides all those voices studying the issues closely can do is make the point. It is up to us to demand of they act on it!
The evidence is mounting that poor policy from our elected representatives can do more than slow a recovery, it can also permanently reduce our long term standard of living. Mark Thoma speaks in plainer English than most and provides an excellent synopsis of both the traditional economics narrative and latest developments on the growing consensus.
In The New Supply-Side Economics he writes:
"Traditionally, macroeconomic policy has been divided into two distinct types. The first type, stabilization policy, attempts to keep output and employment as close to their full employment levels as possible. The idea behind these policies is to minimize, or even eliminate, short-term boom-bust cycles around the natural rates of output and employment caused by fluctuations in aggregate demand.
The second type of policy, growth policy, works on the supply-side and attempts to keep the long-term natural rates of output and employment growing as fast as possible. Thus, if the long-term natural growth rate of output is, say, 2.5 percent, supply-side policy would try to increase this rate, while demand-side stabilization would try to keep us from deviating from it, whatever it might be.
Importantly, these policies were believed to be independent. Monetary and fiscal policy used to stabilize the economy could change how fast the economy returns to the natural rate after a positive or negative shock, but the policy would have no impact at all on the natural rate itself.
But what if this is wrong, as data from the Great Recession suggests? What if demand-side policies impact the natural rate after all? What does this mean for monetary and fiscal policy? It turns out to have important implications."
While not surprisingly for us, the recognition of the limitations of bank credit creation to jump start consumer spending enough to support sustainable economic activity continued progress in our direction.
What's changed? In part the financial crisis created a hole we needed to get out of and the tradition narratives proved either ineffective or inaccurate. Many failed to account for the strength of government inputs or stabilisers. That we've seen a continual drop in the % of the population in the work force not provide a significant drag is important. Charitably, others were in the pocket of banks so unwilling to let the fiscal cat out of the bag. Probably not a stretch to suggest many of those in finance are now actively prodding this conversation with the knowledge of its requirement - who would know better than banks the importance of government support.
Will this finally translate into action from our elected officials? Not likely the US House is busy passing legislation to put a fence around the Federal Reserves ability to support the economy anyway. Besides all those voices studying the issues closely can do is make the point. It is up to us to demand of they act on it!
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