Steven C. Kyle, an expert in macroeconomics and government policy, and a professor of management at Cornell’s Dyson School of Applied Economics and Management, comments on expectations that the Federal Reserve Board will continue buying Treasury securities as a means to stimulate the economy.
He says:
“This is clearly not the most effective way to deal with our continuing slump. With short-term interest rates already hovering near zero, and longer rates at the lowest we have seen in most of our lifetimes, the immediate punch from Fed easing is limited. One thing Bernanke can accomplish is to ensure that inflationary expectations remain high enough to provoke businesses to get their money off the sidelines and into action. Another is to ensure that the real value of debt doesn’t rise with low or negative inflation, thus retarding our climb out of the depths we sank into a few years ago. “What would be the most effective way to deal with the slump? A fiscal stimulus! If our own history doesn’t convince you then the dismal results of European austerity should. Yes, it is indeed possible to cut spending enough to drive unemployment to Great Depression levels. The Spanish have just proved this by repeatedly cutting spending and raising taxes in an economy with lower debt/GDP than Germany has. While you might think there are some in Washington who haven’t figured this out, we are actually much better off in this regard than many realize, including some of the politicians themselves.
“Lots of Democrats have made clear that they think we should have another round of stimulus to create jobs and build productivity-enhancing infrastructure. But what has gotten lost in a lot of the commentary is that quite a few of the Republicans agree with them, at least in terms of the negative effects of austerity. After all, the so called ‘fiscal cliff’ is nothing else but an old fashioned Keynesian contraction.”
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