My two favorite beared liberal Nobel economists agree we need another, bigger fiscal stimulus. My favorite bearded libertarian iconoclast does not think so.
True, we need to stimulate investment, and not through tax cuts. But I would add a qualifier that many businesses are investing quite a lot lately -- in machines, technology/processes, and outsourcing, which allow them to boost productivity and cut U.S. jobs. This is good for their bottom line but not for U.S. workers. Businesses must be stimulated to hire people. Suspending the payroll tax is one way to do that, and it has bi-partisan support. Another idea is to tax banks' excess reserves. Right now they're sitting on about $1 trillion in cash as they borrow at near-zero percent interest from the Fed. Although corporations have accumulated about $1.8 trillion in cash, small businesseses -- the primary creator of new jobs -- can't get the bank credit necessary for them to start up or grow.
Cutting Taxes Won't Help Recovery: Joseph Stiglitz
By Antonia Oprita
October 13, 2010 | CNBC
The US government should stimulate investment in order to ensure solid and sustainable economic growth, not cut taxes, Nobel Prize-winning economist Joseph Stiglitz told CNBC Wednesday.
Stiglitz, who earlier this month accused the Federal Reserve and the European Central Bank of throwing the world into "chaos" with their money-printing, said the first round of the stimulus did work for the US economy and that without it unemployment would have peaked at 12 percent or even 13 percent.
But the government has underestimated the severity of the downturn and did not design the stimulus as well as it could, he added.
"Before the crisis we were very profligate, we consumed. The question is not spending, but how you spend," Stiglitz said.
"If we spend it on investment… we will grow today and we will grow in the future," he added.
[As Stiglitz has noted elsewhere, when government spends money on infrastructure or clean energy, for example, it is creating an asset as well as a liability, but when government gives tax cuts it creates a liability with no offsetting asset. - J]
If the economy continues to remain weak, the US will be "wasting human capital" because a lot of people will be long-term unemployed, he said.
Investment by the government in the internet "really transformed the economy" and, on average, returns on education, health and infrastructure have been good in the US, according to Stiglitz.
Increasing spending and not cutting taxes is the best way to boost the economy, he said.
"When you have households with an overhang of debt, homeowners owing more on their mortgage than the value of the homes, tax cuts are not going to stimulate the economy," Stiglitz said. "What we need now is to stimulate investment."
Fed, ECB Throwing World Into 'Chaos': Joseph Stiglitz
October 5, 2010 | Reuters
Ultra-loose monetary policies by the U.S. Federal Reserve and the European Central Bank are throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.
A "flood of liquidity" from the Fed and the ECB is bringing instability to foreign-exchange markets, forcing countries such as Japan and Brazil to defend its exporters, Stiglitz told reporters in a conference at Columbia University.
"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing."
The U.S. dollar has weakened about 6.5 percent against a basket of major currencies [.DXY 76.485 down -0.16 (-0.21%)] since the beginning of September as prospects for further monetary easing by the Fed have led investors to seek higher returns elsewhere.
That flow of dollars caused currencies to appreciate in many emerging market countries such as Brazil, which offers strong growth prospects. The Japanese yen [JPY=X 81.2 down -0.23 (-0.28%)] has also hit record highs against the dollar on expectation of additional greenback weakness.
Recent actions by those countries to curb the strength of their currency were "necessary," Stiglitz added.
"It's natural in that context for them to say—we can't just let our exchange rates appreciate and destroy our exports," he said.
On Monday, Brazil doubled a tax on foreign investment into local government bonds, while Japan lowered the target for its benchmark interest rate to a range between zero and 0.1 percent.
The Bank of Japan also pledged to buy 5 trillion yen ($60 billion) worth of assets, in a strategy similar to the one adopted by the Fed to pump funds into the economy.
But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.
"Lowering the interest rates may help a little bit, but that's much too weak to address the problems facing the United States and Europe," Stiglitz said. "We need fiscal stimulus."
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