Three months ago, I said that there was considerable disagreement about these issues, but that two things were certain. First, we do not know enough about when, under what circumstances and in what order governments should resort to these checklist items.
Second, trying a combination of these items — even a confused and haphazard combination — was better than doing nothing. All five of the world’s major economies implemented their own confused and haphazard combinations of monetary, fiscal and banking stimulus policies during the Great Depression, and the sooner they did — the sooner each began its own New Deal — the better.
Japan and Britain began their New Deals in 1931. Germany and the US began theirs in 1933. France waited until 1936. Japan and Britain recovered first and fastest from the Great Depression, while Germany and the US followed well behind, and France brought up the rear.
The conclusion that I draw from this is that we should try a combination of all checklist measures — quantitative monetary easing; bank guarantees, purchases, recapitalizations and nationalizations, direct fiscal spending and debt issues — while ensuring that we can do so fast enough and on a large enough scale to do the job.
Yet I am told that the chances of getting more money in the US for an extra round of fiscal stimulus this year is zero, as is the chance of getting more money this year to intervene in the banking system on an even larger scale than America’s Troubled Asset Relief Program (TARP).
There is an 80 percent chance that waiting until next year and seeing what policies look appropriate then would not be disastrous. But that means that there is a 20 percent chance that it would be. And the US, it should be noted, is the most aggressive and best behaved of all major governments.
J. Bradford DeLong, a former assistant US Treasury secretary in the Clinton administration, is professor of economics at the University of California at Berkeley.
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