- The central cause of the current economic state of affairs is bad monetary policy from 2002 through early 2006.
- Stimulus should not stimulate or reinforce the misallocation of resources.
- Stimulus should create economic value and not destroy it.
- The best stimulus consists of incentive-relevant tax reductions.
Morgan Stanley (Asia) chairman Dr Stephen Roach, who warned of past bubbles, has also spoken on the stimulus
Roach also said he doubted that the use of monetary policy to boost the economy could be as effective as before.Speaking of interest rate cuts Japan's economy has not only hit the wall, it has fallen off a cliff;
“One of the consequences of lowering interest rates is high inflation. But my utmost concern is what the exit strategy for this aggressive easing is? How do you wind down without tipping to deflation,” he said, citing the example of Japan, where the economy had not been stimulated even with near zero interest rates.
Roach said he preferred fiscal policies, especially those which focused more on investments rather than private consumption, as he felt businesses were better credit managers than individuals.
On the US financial crisis, Roach said he blamed it on the reckless consumption, politicians and the central bank.
Stung by collapsing exports, a surging Japanese yen, and ineffective government, Japan's Cabinet Office today announced that Japan's gross domestic product slumped at an astonishing annualized rate of 12.7% between October and December. The fall is more than most Tokyo economists expected and marked the biggest quarterly slump since 1974. "There's no doubt that the economy is in its worst state in the postwar period," Economic and Fiscal Policy Minister Kaoru Yosano said in Tokyo
Mario Rizzio also notes that the Obama argument that the stimulus "will save jobs that otherwise would have been lost" is counterfactual as does Greg Mankiw;
The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.
Obama is advised by a well regarded team which includes Central Banker Larry Summers, here he is in 1999
And awful as the Asian correction is, it was, in a sense, inevitable because those economies had trundled billions of dollars into useless real estate and industrial development. "In general," said Summers, 44, as he sat in the Frankfurt airport last September recovering from a hectic trip to Moscow, "we start with the idea that you can't repeal the laws of economics. Even if they are inconvenient."
And so it goes, Larry is on the right.
