Sunday, December 21, 2008

We shouldn't try to just print away the crisis

Tim Duy wrote on Thursday:

The problem, in my mind, is that the rest of the world either refuses or is simply incapable of shouldering some of the burden of global adjustment. This inability to adjust appears to be the end result of almost thirty years of global acceptance and US indifference to external imbalances. Global consumption and production patterns, both spacially and intertemporally, are so misaligned that it looks like we are all now in a race to the bottom together. An amazing global policy failure. So, so depressing.

I agree that only attempting to print away the short term crisis would not be the best way to handle it, because it wouldn't address long term problems and grossly inefficient policies the Republicans have given us over the last generation. It would also leave us with regular repeats of such crises.

Investment, especially high return public investment of the kind the pure free market will grossly underprovide due to well established in economics market problems, is far too low, and consumption is far too high. This is a direct and very strong result of, among other market problems, what Tim's Steve Waldman link was indirectly referring to -- the pink elephant of economics, positional/context/prestige externalities.

This and other long-term problems, harmful policies, and anti-thinking, simple-minded Republican ideology must be corrected, rather than solely trying to print away this short term crisis only to have regular repeat performances and low long-term growth in wealth, science, medicine, and total societal utility.

Of course, it would be best to do both areas well, to have strong and smart monetary and non-monetary measures.