Posted by: Dirk | November 16, 2010

Once more: To ease or not to ease? (QE2)

The WSJ provides some space for Joseph Stiglitz:

“President Obama has rightly said that the whole world will benefit if the U.S. grows, but what he forgot to mention is…that competitive devaluation is a form of growth that comes at the expense of others,” Mr. Stiglitz said at the Mipim Asia real estate conference. “So I think it is likely to present problems for the global economy going forward.”

Rather than just looser monetary policy, the Columbia University economist urges more government spending by countries whose low borrowing costs make it affordable—notably the U.S.

“We really should learn the lesson from China,” he said. “If you take money and spend it on investments, then you grow the economy in the short run, but you also grow the economy in the long run.” He says China’s massive infrastructure investments over the past two years have “changed the economic geography” of that country, setting it up for strong growth in the years ahead.

The U.S. should do the same, he said, adding that because it has funded infrastructure so poorly over the past 20 years, projects will likely have strong positive return on investment.

I agree with both Ben Bernanke and Joseph Stiglitz, and probably they would agree with each other, too. Let me briefly explain why.

Ben Bernanke is right because fiscal policy is not an option in the US with the way things are in the political sphere. Since the Fed’s the only one alive now, he has to try something, even if the only result is that other countries complain about unfair depreciation. The hope might be that more people will look into the economic problems and make an extra effort to try to understand it, and then base their decision on something close to scientific thinking, and not ideological belief.

Or, if the Fed pretends to play it rough and policy makers in the rest of the world think it through, they might understand that the Fed is willing to inflate itself out of its misery at all costs (is it?). This is a global game, after all, and some manoeuvering might improve the Fed’s position.

Joesph Stiglitz is right because fiscal policy is probably the only way out of this. The countries that can go into debt should do so. And by the way: the private sector is invited to lead the way. It’s just that they don’t want to. Which is OK, since debt should not be forced on private sector institutions. If you have to do it, try to use democratic institutions so that there is some accountability. Also, the government alone can provide a large enough stimulus that makes its commitment to sustaining demand credible. Only this, it seems, will keep away the ghost of Herbert Hoover (deflation). Expectations still do matter.

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