Plain Sense Economics

Our focus during the banking/credit crisis has been on the supply side of the equation – shaking the tree, opening the spigot (pick your metaphor) to release more money into the economy for borrowers.

We’re hearing more opinions now that our attention needs to turn to fiscal policy initiatives, which largely deal with the demand side. My colleague, Ric Holt, made this point at a forum last week on the SOU campus.

Paul Krugman wrote about the same thing in his October 16 column.

It’s politically fashionable to rant against government spending and demand fiscal responsibility. But right now, increased government spending is just what the doctor ordered, and concerns about the budget deficit should be put on hold.

In the good old days I would talk about fiscal policy as an imperfect, inefficient economic tool. It suffered from important delays – political, administrative, and implementation – and due to its origins in the legislative and executive branch, fiscal solutions are often not quite right. We prefer (preferred) monetary policy solutions for their relative insulation from political influence, and their relative speed of implementation.

Credit is still not flowing as it should, although there are a few hopeful signs: the London Inter Bank Offered Rate started declining this past week, after rocketing up earlier.

Still, economists and policy makers are starting to look ahead a bit, trying to gauge the depth and length of what seems like a certain recession. We should see the Federal Reserve reducing its Fed Funds target rate – in a traditional monetary policy move, but Krugman and others argue that won’t be enough.

Despite Krugman’s wish that we put concerns about the Federal budget deficit aside, the financial bailout and one or more fiscal stimuli to be passed by Congress will surely strain it.