Why A Much Bigger Stimulus Won’t Work

The Eccles Building (wikimedia)

The Eccles Building (wikimedia)

Last night I read with interest Robert Pollin’s case in The Nation for a much-more robust job creation strategy aimed at “creat[ing] 18 million new jobs over the remaining three years of the presidential term . . . [i]f such initiatives are successful, the official unemployment rate will stand at around 4 percent when Obama runs for re-election in November 2012.” Unfortunately, he skips rather lightly from the case in favor of such a broad general goal to a rather in-the-weeds discussion of specific measures he thinks might achieve it. What’s really needed, I think, is more thorough discussion of the obstacles to undertaking any such effort.

Most importantly, your fiscal policy and your monetary policy can’t work at cross-purposes. Or, rather, undertaking fiscal initiatives that the monetary authorities oppose is likely to be directly counterproductive. For months now it’s been clear that the Fed doesn’t want to undertake any additional monetary expansion of its own. And in his sworn testimony, Fed Chair Ben Bernanke indicated that he didn’t believe additional fiscal expansion was a good idea either. All the talk has been of “exit strategies,” paths to tighter monetary policy that the Fed will enact when it thinks the time is right. And now the Fed has started taking small contractionary steps. Under the circumstances, it seems overwhelmingly likely to me that dramatic fiscal expansion would simply increase the sway of the FOMC’s hawks and lead to more monetary contraction.

I think Pollin’s piece sort of implicitly recognizes this, by making clear that one of the most effective job-creation levers around would be to get banks to do something with their excess reserves. Bernanke has, however, made clear that one exit strategy he has in mind is to do the reverse of this and raise interest payments on excess reserves to encourage banks to engage in more hoarding. And the way our system works, there’s no way for the White House to get around this. Bernanke can’t micromanage elected officials’ fiscal policy, but there’s just no way you could make a dramatic additional fiscal expansion effective without his support and there’s every reason to think such support won’t be forthcoming.

Now Obama’s not a passive victim in all this. He chose to renominate Ben Bernanke when he didn’t have to, and he chose to lobby hard for Bernanke’s confirmation when it was in trouble. What’s more, if Bernanke is secretly inclined to favor more expansion (as Brad DeLong, puzzlingly, keeps arguing) Obama has it within his power to give Bernanke some backup by filling the two open Fed seats. But what he can’t do is just have congress embark in some large new direction.