Nevertheless, there is some concern that growing inflationary expectations might result in rising long-term interest rates, offsetting the benefits of the stimulus. Here, monetary authorities must be vigilant and continue their “non-standard” interventions — managing both short-term and long-term interest rates.
All policies entail risk. Not preparing for a second stimulus now risks a weaker economy — and the money not being there when it is needed. Stimulating an economy takes time, as the Obama administration’s difficulties in spending what it has allocated show; the full effect of these efforts may take six months or more to be felt.
A weaker economy means more bankruptcies and home foreclosures and higher unemployment. Even putting aside the human suffering, this means, in turn, more problems for the financial system. And, as we have seen, a weaker financial system means a weaker economy, and possibly the need for more emergency money to save it from another catastrophe. If we try to save money now, we risk spending much more later.
The Obama administration erred in asking for too small a stimulus, especially after making compromises that caused it to be less effective than it could have been. It made another mistake in designing a bank bailout that gave too much money with too few restrictions on too favorable terms to those who caused the economic mess in the first place — a policy that has dampened taxpayers’ appetite for more spending.
But that is politics. The economics is clear: The world needs all the advanced industrial countries to commit to another big round of real stimulus spending. This should be one of the central themes of the next G20 meeting in Pittsburgh.
Joseph Stiglitz is a professor of economics at Columbia University and chairs a Commission of Experts, appointed by the president of the UN General Assembly, on reforms of the international monetary and financial system.
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