In an effort to reduce the sense of economic uncertainty in the minds of people, the Fed has said that it will keep the Fed Funds Rate close to zero until at least mid-2013. Gregory Mankiw wants the Fed to do more. He wants the Fed to clearly state under what economic conditions it would eventually start raising the FFR. This, he thinks, will give people a clearer view of the future, and, thereby, help the economy because people do not spend when they are uncertain about the future. (But, conceding the weakness of current macroeconomics, he also admits that it would be hard for the Fed to satisfy his wish.)
Christina Romer makes the important point that short-run fiscal stimulus -- payroll tax cuts and an increase in infrastructure spending, paid for with money borrowed by the government -- will be more effective in bringing unemployment down quickly if it is combined with a long-run plan to do the opposite (raise taxes, cut spending, pay back the government's debts). Although she does not spell it out, I suppose her reasoning is like this: Money borrowed today will have to be paid back. So, in the future, taxes will have to go up and spending will have to be cut (barring the fairy tale scenario of blistering economic growth enabling debt repayment without the need for tough choices). If a long-run debt repayment plan passes Congress, people will have a clear idea about how things will unfold. Without such a plan, people will fear that the government will go through a great deal of chaos before the inevitable debt repayment takes place. And people will be more likely to spend their money freely today under the former scenario rather than the latter. That is why, to keep the people spending their money today, it is important to keep them calm about the future. And that is why, a plan to borrow trillions for stimulus spending today will work best if it combined with a plan to do the opposite in the future. (Note that although Mankiw is talking about the monetary policy of the Fed and Romer is talking about the fiscal policy of the government, they are both emphasizing the need to keep people's expectations calm and relaxed.)
Tyler Cowen argues that although the European Central Bank's newfound willingness to print euros and lend those euros freely to Euro zone banks has solved the euro zone's short-run problem, the 2011 crisis will eventually return if economic growth does not pick up. The argument is obvious and unsurprising.
Robert Frank rehashes an argument he has been making for quite a while, most recently in his new book "The Darwin Economy." As more money ends up with the top one percent, they spend the bulk of that money on fancier homes. As the happiness of people depend not on what they have but on how what they have measures up to what others have, the bottom 99 percent also end up running after fancier homes in fancier school districts. We all end up with more expensive homes, but we feel no happier: if some people at a football match stand up to get a better view, eventually so will everybody else, and instead of better views all that people will get in the end are achy feet. Frank's argument is persuasive, but he has been flogging this theme for a long time, perhaps out of frustration that policy makers have not followed his presciption (of a progressive consumption tax) to attack the problem that he has identified.
Robert Shiller proposes changes in the tax deduction for mortgage interest payments so that poorer people would be better placed to benefit from it. That's fine: who could argue against making the tax system more helpful for the poor? But he spoils it for me by saying unpersuasive things to glorify government efforts to encourage home ownership: "Homeownership fosters citizenship, builds stronger families and communities, encourages active participation in the economy and, ultimately, bolsters economic confidence." Where's the evidence for these big claims? How do you measure citizenship, the strength of families and communities, etc.? And how do you know that these alleged benefits outweigh the costs of having people's incentives distorted by this particular tax break? The argument in favor of ending the tax deduction for mortgage interest, once and for all, is pretty clear.
I am a big fan of Richard Thaler and I have used "Nudge" by Thaler and Sunstein as a textbook in my behavioral economics course. Here he goes over a few well worn ideas to encourage -- but not compel -- people to make healthier choices in their daily lives.
Update (January 3, 2012): Greg Mankiw's wish for the new year seems to be coming true:
Now the Fed will include projections about the “expected target federal funds rate in the fourth quarter of the current year and the next few calendar years, and over the longer run,” according to notes from its Dec 13. meeting released by the Federal Open Market Committee on Tuesday. It will also include projections about “the likely timing of the first increase in the target rate given their projections of future economic conditions.”It remains to be seen whether the annotations accompanying these interest rate forecasts will provide some clarity on what it is that the Fed tries to stabilize: Is it inflation? Unemployment? Growth rate of nominal GDP?
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