Shiller: We Need More Stimulus, and Clear Targets
Robert Shiller says we need more stimulus and also more bank rescue, and perhaps more provocatively says that what we need to do is set explicit policy targets. One would be a demand target, and one a credit target:
Following this target, aggregate demand should be sufficiently high that firms producing good products at a price the public would want to pay will be able to sell them. And if this target is met, skilled labor willing to work at a wage that makes it profitable to sell such products will be able to get a job.
The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies, but there should be an explicit measure of their success, and until that is reached, the scale and time frame of such policies need to be extended.
Ever since it initially became clear that the administration might have some trouble getting a stimulus bill through congress, the administration has taken basically the reverse tactical approach. They’ve taken as much stimulus money as they can get, and have been declaring the resulting stimulus program to be likely to work. Similarly, on the banking front they’re scrambled to put together the PPIP with funds that they’ve already been giving and have been declaring that program likely to work. In both cases, however, mostly outside analysts who broadly share the administration’s perspective think that the political constraints are forcing them to do too little.
A different take would be to establish targets. We want demand at this level, and credit at this level. Then you could be clear that the measures currently underway will probably help, but are unlikely to be fully adequate. Shiller says “It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.”
9 Responses to “Shiller: We Need More Stimulus, and Clear Targets”
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April 16th, 2009 at 11:54 am
You should probably make the picture smaller.
(or alternatively, bigger)
April 16th, 2009 at 11:58 am
If he declares a hunt for clear targets then it does not prove the need for more stimulus size. Once he introduces the concept of multipliers, such that some targets have much higher pay-off, then he must identify the targets before he declares for bigger.
The reason is something called multiplication, which Schiller somehow forgets to insert.
April 16th, 2009 at 12:00 pm
Shiller’s proposal is not just about scale but time: the idea is to give policymakers the grounds to keep doing more for longer until we reach the targets. Which sounds like a pretty good idea to me–I am in fact worried that we will read too much into the first hopeful signs and not do enough in the future to make the recovery sustainable.
April 16th, 2009 at 12:09 pm
DTM- I’m more than worried, I think that’s inevitable. Hell, even Roosevelt made that mistake. The political pressure in favor of making it, now as then, is almost irresistible. Obama has already made multiple genuflections to the god of deficit reduction uber alles and he’s going to be held to that.
The debt-driven mass-consumption-of-toys economy is not coming back. We don’t even have a clue right now what will
replace it, and whatever it is will not come about overnight. Only the government can fill that temporal gap. But few people in the general public understand this and nobody in the Obama administration is even trying to make a case for it.
April 16th, 2009 at 12:16 pm
Steve LaBonne,
I guess I am more willing to take a wait-and-see attitude. As Shiller points out, we know better know than Roosevelt and his cohort knew. And while Obama has in fact talked about long term deficit reduction, he has also talked about being willing to do whatever it takes to produce a sustainable recovery. And in truth these things aren’t inconsistent, provided the “long” in “long term deficit reduction” is allowed to be long enough.
Anyway, we’ll see.
April 16th, 2009 at 12:52 pm
I badly want you to be right, because the alternative won’t be pretty. Here’s hoping.
April 16th, 2009 at 12:58 pm
Being unwilling to tell people what hundreds of billions of taxpayer supplied or borrowed funds have been directed to really doesn’t do much to damper the psychology of outrage. A good part of this state of unhappiness is due to insufficient transparency, and the Obama Administration seems to believe that minimizing transparency is part of the cure. Call it crazy, but maybe being frank with citizens, for a change, is the only way to shrink the psychology of outrage.
April 16th, 2009 at 1:12 pm
DTM,
It is not about time, it is about his ill-conceived theory of animal spirits; incomplete, incorrect, and basically a red herring.
He thinks the consumer is depressed, but the consumer is simply different, and the new consumption model has different constraints than the old consumption model. Until Schiller gives a complete model of animal spirits, then he is at a loss to figure out what the new constraint is. But that new consumer constraint may be solved with a multiplier of 5, while all the rest of the crap they do has a multiplier of .5
So, following Schiller, we will continue to confuse the economy, throwing money at the good and the bad. He has the “more cow bell” problem, he lives in a scalar world where there is only depressed and exuberant.
April 16th, 2009 at 2:38 pm
What Shiller says is 100% right, but he says it in a more abstract way than James Galbraith would.
I would say that a large share of credit (over half of the financial sector) must be replaced by wage labor, and that can be achieved only by government spending.