The Only Thing We Have To Fear Is Coordinated Expectations Of A Slow-Growth, Low-Spending Equilibrium

Robert Samuelson’s column on excessive risk aversion holding back the economy raises a number of interesting points. I think, however, that he develops an unduly psychological view of the problem that leads him to a mistaken policy conclusion that “the call for stimulus can cause consumers and businesses to retrench by focusing their attention on the economy’s weakness.”

A better way to think about this is as a problem of coordinated expectations. Some stuff goes wrong, and people come to believe that growth is likely to be slow. They recognize that many workers and production facilities are idle, and therefore could be hired at low cost. But they also assume that many workers and production facilities will continue to be idle, and therefore that sales will be low even for sound businesses. What’s needed to resolve this isn’t a pep talk, but coordinated policy action. The monetary authority needs to say “we are committed to closing some of the gap in total nominal spending.” That way, if you’ve got cash on hand you’re eager to unload it. Either there will be a large increase in real output, meaning that your investments will be profitable, or else there will be a spurt of inflation and your cash will be devalued. If you’re an optimist by nature, you respond to the new policy commitment by investing in business capacity. If you’re a pessimistic, you just buy consumption goods and services. Either way, the commitment to increase total spending causes total spending to increase. There is then an important question of whether or not the monetary authorities in some sense (legal, political, institutional) need the cooperation of fiscal authorities to make this commitment in a credible way. Perhaps only money-financed government purchases will get the job done. But however you like it, the point is that the role of policymakers isn’t to play psychologist-in-chief it’s too take advantage of the fact that the government is really gigantic and has the ability to create money out of thin air. Those powers, plus a little Rooseveltian resolve, should be able to change expectations around.