The Well-Behaved Economist - 1

During the weekend of our first date, Joy and I attended a ward dinner party. She left me at the table with several venerable brethren, and we talked a bit. When she returned, she asked if I had been telling them all about economics. They responded that I had mentioned it a little as they asked about it, but hadn't inundated them with it. I forget what Joy intended to say, but what came out was, "Yes, he's my well-behaved economist."

In line with that reputation, I don't often bring up economics on this blog. I'll likely start up an econ blog once I have a job to participate in some of the broader discussions, but this is a family blog, come on. But while I was driving with the brethren to the stake priesthood meeting, someone asked a good economics question that's being tossed around on the econ blogs and I came up with a thought no one has mentioned yet on them! So I've been actually excited to talk about economics on here. And the great thing about blogs is, if you don't care about fiscal stimulus policies, you don't have to read the rest of this post!

So, some quick background. Many economists are guessing the probability of the US slipping into a recession in the next year is about 30-40%. Some say higher, some say lower, that's the mode guess. Some folks, concerned about this, are trying to think of ways the government might avoid or ameliorate the recession by increasing spending or cutting taxes [and hence increasing our spending]. The question was asked, do I think a flat tax rebate given to everyone will help?

Some of the important points brought up by professors Craighead and Mankiw include:

1) It depends on how the tax rebate/spending is actually implemented. To the extent it gets to people who are a bit cash-strapped at the moment (we call it liquidity constrained), they'll spend it and have nice Keynesian effects on the economy.

2) The problem is, fiscal stimulus nearly always comes AFTER the trough has been reached and the economy is back on the rebound, and getting this Congress and this President to agree on just what the package should entail will take a while. There's little reason to stimulate an economy that is already rebounding, and it can in fact hurt our economy longer-term by increasing the deficit and the effects of future tax increases to pay it off, as well as by making monetary policy more complicated to use.

2b) Although it's also pointed out that our last two recoveries produced very few new jobs and there might be some point in stimulating an economy IF it provided new jobs. See point 1 on how the stimulus is framed.

The point I thought of that I haven't read elsewhere deals with the fact that the current specter-recession we may be facing is largely driven by just a few key sectors of the economy: housing and banking. Giving a lump-sum tax rebate to everyone in the country of about $300 (one of the economist preferred means of doing things because it's the least distortionary) might increase some people's spending, but will have almost no effect on healing the housing and banking sectors' ailments. They would still go down, and though they might not bring the economy as far down with them, the effect would still be the same. Far better, I argue, to keep our measures focused on the area where there are problems.

So I weigh in on the side that says the fiscal government shouldn't get involved. This is banking's arena and monetary policy should have the go-ahead (if anything should be done).


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