Worries and Options

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Paul Krugman notes that the economy is falling fast and it may be difficult to bring stimulus to bear all that rapidly:

Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.

This is one reason why I think it’s important for a stimulus package to have a heavy element of aid to state and local government and related agencies. The federal government contains a lot of automatic stabilizers (spending keeps going even though revenues fall) that should act as stimulus, but those stabilizers are offset by the pro-cyclical nature of state and local budget practices. A federal promise of aid will forestall state and local budget cuts, and thus allow the automatic stabilizers to work. All that can be mobilized on a rapid time scale. Somewhat similarly, the federal government could pledge funds to transit agencies in order to finance fare cuts rather than the contractionary combination of fare hikes and service cuts that we’re currently looking at. Add “a few tens of billions” worth of shovel-ready infrastructure projects, and you might be getting somewhere.

But beyond that, it does seem that it’s important to not just say “conventional monetary policy can’t do any more, so we need to rely on fiscal policy” and hope for the best. My understanding is that there’s such a thing as “nonstandard monetary actions” that the Fed can undertake to try to produce monetary expansion. I won’t try to pretend to really understand what those are or how they work, but it seems like an important and potentially promising line of inquiry and I will hereby commit to reading something about it later.