Brad DeLong wrote:
> Remember that I (and a lot of other fiscally-orthodox Dems) are
> capital fetishists: believers in large positive externalities from
> investment through learning-by-doing, learning-by-using, and
> worker-employer quasi-rent sharing. Thus a low national savings rate
> terrifies us.
>
> Thus we favor the policy mix proposed by Robert Solow back in the
> early 1960s: tight fiscal policy (to boost national savings); a
> redistributive tax system (to level out the distribution of income
> and create large fiscal automatic stabilizers); loose monetary policy
> on average (to counteract the tight fiscal policy); and delegation of
> the bulk of stabilization policy to the Federal Reserve.
>
> Of course, this requires that (a) the Federal Reserve be competent,
> (b) the Federal Reserve have a sound and accurate view of what
> "maximum employment and purchasing power without accelerating
> inflation" means, and (c) the economy not have gotten itself so
> wedged that monetary policy is ineffective.
>
> Neither (a), (b), nor (c) can be taken for granted. (Indeed, back in
> the spring of 1992, IIRC, Laura Tyson, Larry Summers, and Alan
> Blinder were all sufficiently alarmed by the then-ongoing "credit
> crunch" to say that it was time to restore fiscal policy to a more
> prominent stabilization policy role.) But *here* and *now* I think
> all three of them hold--but (c) does not hold in Japan, and (b) does
> not hold in Europe.
>
.
But in the U.S., fiscal policy has been getting progressively tighter even
while national savings have been getting lower. If tight fiscal policy
doesn't produce higher national savings, what good does it do? In candid
moments, Fred Bergsten might say it restrains government spending.
And if investment is such a tonic (learning-by-doing, etc.) why not do public investment? Fiscally orthodox Dems make occasional noises about public investment, especially the "education&training" mantra, but it's clearly much further down their list of priorities than, say, protecting the surplus.
As for Europe's contractionary monetary policy, the U.S. Treasury's line has consistently been that loosening must happen in the context of "structural reforms," meaning junking the welfare state, including the restributive tax policy that Brad lauds so much.
Seth