Brad DeLong Rejoins the Reality-Based Community; Mark Thoma tells us why it is so

Even if his inspiration for doing so comes from (of all places) the HuffPo, This is spot-on:

Unless something big and constructive in the way of global economic policy is done soon, we will have to change Stiglitz’s first name to ‘Cassandra’ — the Trojan prophet-princess who was always wise and always correct, yet cursed by the god Apollo to be always ignored. Future economic historians may not call the period that began in 2007 the ‘Greatest Depression.’ But as of now, it is highly and increasingly probable that they will call it the ‘Longest Depression.’

Sadly, his prescriptions–good prescriptions, I hasten to note*–address the sources of the Depression, not the most direct solution. For that, we turn (staying in the popular press) to Mark Thoma (via, er, Mark Thoma):

Private investment could be increased by lowering the interest rate with monetary policy, but since the interest rate is as low as it can go, this won’t be effective.

Another solution is to raise private investment through mechanisms such as tax incentives. But in a stagnating economy, business confidence is low, and it’s unlikely this will have much of an effect. It’s worth trying, but it’s unlikely to be enough.

Yet another solution is to raise public investment; infrastructure spending is a frequently mentioned candidate. This is attractive for two reasons. First, investment in U.S. infrastructure has been lagging, which needs to be addressed independent of the secular stagnation problem. Second, while tax incentives amount to leading a horse to water and hoping it will drink, government investment is determined by fiscal policy. It can be whatever value Congress and the president want it to be.

This is why those who are worried about secular stagnation have repeatedly called for substantial investment in infrastructure. [link from original]

Give Mark extra credit for being one of the few economists willing to say publicly that Excess Reserves are not “investment,”** even as he hedges whether “secular stagnation” is the current reality.


*”What we need now is 1) debt relief to unwind the overhang and 2) much tighter financial regulation to prevent the growth of new fragilities.”

**He doesn’t take the next step and state that IOER is being paid because banks are insolvent and robbing the Fed is a victimless crime, but we shouldn’t expect everything.

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