Monday, July 7, 2008

Fiscal stimulus = job creation = full employment?

Mark Thoma pointed to Ken Rogoff's comment on the fiscal stimulus:
The spectacular and historic global economic boom of the past six years is about to hit a wall. Unfortunately, no one, certainly not in Asia or the US, seems willing to bite the bullet and help engineer the necessary co-ordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policy makers in most regions have to start pressing hard on the brakes, not the accelerator. ...

I am puzzled that so many economic pundits seem to think that the solution is for all governments, rich and poor, to pass out even more cheques and subsidies so as to keep the boom going. Keynesian stimulus policies might help ease the pain a bit for individual countries acting in isolation.

It makes me wonder if central banks and governments are thinking of practicing Keynesian fine-tuning again at the expense of fighting inflation. Of course, I don't believe that central banks are totally discounting the inflation risk but I am wondering if the low inflation of the past have left them convinced that they were responsible for the low inflation and this has somehow made them overly confident that they can fully contain the inflation threat and at the same time stimulate the economy. What if the low inflation environment of the past decade can be attributed more to good luck than good policy?

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