Tuesday, July 5, 2011

Growth: Baker's how-to

Dean Baker I wrote about yesterday. His post is The Only Real Solution for Budget Deficits: Growth. The first half of that post is dedicated to the argument that the way to balance the budget is through economic growth. The second half looks at ways to achieve growth:

This would include not only fiscal stimulus, but also more expansionary measures from the Federal Reserve board.

Baker wants to see the Fed "pushing for more expansionary monetary policy - steps like targeting long-term interest rates or even a somewhat higher inflation rate."

"The Fed, together with the Treasury, could also be pushing for a lower dollar."

"Finally, if the Fed opted to hold the bonds that it has purchased through its various quantitative easing programs, it could directly reduce the deficit... If the Fed bought and held $3tn in government bonds, it would lead to interest savings of close to $1.8tn over the course of the next decade."

Buried in the middle of all that, there is this warning of sorts from Baker:

There is no reason that the Fed should not be pursuing this path, at least until there is some evidence of inflation posing a problem.

So, as soon as inflation starts to pose a problem, Bakers plan falls apart.

But "a somewhat higher inflation rate" is part of his plan. Apparently, then, Baker's plan is to re-define the concept of inflation posing a problem.


Sackerson said...

Need for extra demand discussed by Aussie economist here:


... on which my comment (awaiting moderation) is:

There appears to be a move by some US banks to halve the debt outstanding on mortgages that are “underwater” but on which the homeowner has so far kept up the payments. Would you welcome this as a creative way to ease the burden on the private sector and (by reducing both bank assets and liabilities) proportionally increase bank reserves, so increasing confidence and stimulating demand??


The Arthurian said...

Oh, Sackerson, this is excellent!!

On top of actually doing the right thing, this plan could help people see bankers as people again, rather than 'banksters'.