Feldstein: The Dollar is the World's Primary "Investment Currency"

Martin Feldstein says the role of the dollar in foreign exchange reserve balances has changed:

The dollar’s fall reflects a new role for reserves, by Martin Feldstein, Commentary, Financial Times: I am often asked whether the ongoing decline of the dollar implies that it can no longer serve as a reserve currency. My short answer is that most countries no longer hold dollars and other currencies as traditional reserves. The role of foreign exchange balances has changed from being short-term funds used to bridge export-import gaps to being long-term investment funds. In this new world, the dollar has shifted from being almost the sole “reserve currency” of many countries to being the primary “investment currency”, a role that it will continue to play far into the future. 

A bit of history is helpful... In 1997 the Thai government tried to maintain the Thai bhat at an overvalued level. When it exhausted its reserves doing that, it was forced to devalue, generating substantial profits for those who had borrowed bhat and sold it for dollars. 

Speculators then attacked other Asian currencies. Even a currency not fundamentally overvalued could be profitably attacked if speculative borrowing and short-selling could force the government to exhaust its reserves and have to devalue.

These experiences taught governments two lessons. First, it is dangerous to try to maintain an overvalued currency. Second, even if its exchange rate is not overvalued, a country could face a successful attack by forex speculators if it does not have a very large amount of foreign exchange.

Countries responded by deliberately keeping their currencies undervalued to run trade surpluses and using these surpluses to accumulate foreign exchange. We now see Korea with foreign exchange assets of $200bn (€136bn, £123bn), Taiwan $300bn, Thailand $100bn and China more than $2,000bn.

These funds are no longer held to manage temporary swings in imports and exports or investment flows. They are best seen as investment funds that also deter attacks by forex speculators. Similarly, the oil-producing countries ... recognize the investment nature of their foreign exchange accumulation. Instead of just holding these balances in short-term US Treasury bills, they have created sovereign wealth funds with sophisticated investment strategies.

It is prudent for any country with large foreign exchange balances to diversify those funds. ... That diversification cuts demand for the dollar, putting pressure on its value. ... But even as countries diversify away from exclusive reliance on dollars, the dollar will continue to be the main form of liquid investment for countries around the world. 

As this portfolio rebalancing comes to an end, demand for dollars will stop falling ... What looks like a crisis of confidence in the dollar as a reserve currency is just part of the evolutionary process that will eventually halt the dollar’s decline.

Obama Says Banks Should Lend More

Obama tells bankers they should lend more to small businesses and homeowners:

Obama Tells Bankers That Lending Can Spur Economy, by Helene Cooper and Javier Hernandez, NY Times: President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others.

Meeting with executives from 13 financial institutions, Mr. Obama sent a clear message that the industry had a responsibility to help nurse the economy back to health and do more to create jobs in return for the bailout last year that kept Wall Street and the banking system afloat.

But ... Mr. Obama also confronted the limits of his power to jawbone the industry. ... The heads of three of the biggest firms — Goldman Sachs, Morgan Stanley and Citigroup — did not even make it to the White House meeting in person, having waited until Monday morning to travel to Washington and then being held up by fog.

“America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” Mr. Obama said in remarks after a midday meeting with bankers at the White House. “Now that they’re back on their feet we expect an extraordinary commitment from them to help rebuild our economy.” ...

Bank of America said after the meeting that it would increase lending to small and mid-sized businesses by $5 billion next year over what it lent to them in 2009.

Speaking outside the White House, Richard K. Davis, the chief executive of U.S. Bancorp,... said financial institutions would re-examine small business loans that had been denied, but he cautioned that banks had a responsibility to carefully evaluate the qualifications of each client. “We simply want to assure that we make qualified loans,” he said. ...

The tone for the White House meeting with the bankers was set Sunday night when CBS’s “60 Minutes” broadcast an interview in which Mr. Obama said “I did not run for office to be helping out a bunch of fat cat bankers on Wall Street.” ...

“We have to get them off the sidelines and get them to play a more active role in our economic recovery,” Rahm Emanuel, the White House chief of staff, said on Sunday. “They play an essential role in helping the economy grow.”

There are hurdles to get over on both the demand and supply side of the equation. Because of the recession, the demand for loans for new investment and for other purposes is down, but when firms do apply for credit, they are less likely to get it because banks assess credit worthiness partly based upon current economic conditions. The poor state of the economy has led them to conclude that many loans that might be made in better times are too risky to make right now

On the demand side, tax cuts and other incentives would help, but the supply of credit has to be addressed too. Yes, there's plenty of liquidity available, bank vaults are overrun with funds, but banks are reluctant to lend in this environment (particularly small and medium sized banks who face lots of uncertainty over their exposure to commercial real estate loans that may or may not be paid off). A solution to this is for the government to insure the loans in some way through tax write-offs, direct loss sharing, subsides, etc., there are lots of ways to do this, but it's hard to imagine anything like this happening in the present political environment, and the desirability of encouraging risky loans as a solution to our problems is questionable in any case (the money may be better spent on public projects with a high social return). However, if the government wants to encourage more lending in the private sector, something along these lines will need to be done. I don't see how speeches and meetings with bank executives asking them to lend more will do much to solve the problems, particularly the problems at smaller banks.

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links for 2009-12-14

• Three steps to a safer financial system - FT.com
• Greg Mankiw, Stimulus Critic: So Wrong He's Actually Right - FiveThirtyEight
• US vs. Canadian Monetary Policy During the Boom - David Beckworth
• A new paradox - Paul Krugman
• Too Big to Reform? - Howard Davies
• Identifying a fair deal on climate change - voxeu.org
• Using a hammer or a wrench to pop asset price bubbles? - Antonio Fatas
• Three centuries of climatic variation and world income distribution - voxeu.org
• The evolving role and definition of the federal funds rate - Munich RePEc
• Blair sold Iraq on WMD, but only regime change adds up - Hans Blix
• New Deal 2.0 - links
• Economix - links
• Felix Salmon - links
• Economists Forum - links
• FT Alphaville - links
• Money Supply - links
• Credit Writedowns - links
• Marginal Revolution - links
• Abnormal Returns - links
• Market Talk - links
• Brad DeLong - links
  

"Defining Success for Climate Negotiations in Copenhagen"

Robert Stavins gives his assessment what will constitute "real progress" in the Copenhagen climate talks:

Defining Success for Climate Negotiations in Copenhagen, by Robert Stavins: ...[T]he fact that the White House has decided to send the President to Copenhagen for the final day, where he will assemble with some 90 other world leaders, and participate in closing statements (not to mention photo opportunities), indicates that the Administration is relatively confident that the talks will not collapse in a logjam of disagreement between the industrialized world and the developing countries, but rather that there will be a successful outcome.

The key outstanding question is whether the outcome will be one that provides a sound foundation for meaningful, long-term global action, not simply some notion of immediate, albeit highly visible triumph. ...

The gloom and doom predictions we’ve been hearing about the global climate negotiations taking place in Copenhagen this week and next are fundamentally misguided. The picture is much brighter than it might seem for ... coming up with a successor for the Kyoto Protocol, which essentially sunsets in 2012.

The best goal for the Copenhagen climate talks is to make real progress on a sound foundation for meaningful, long-term global action, not some notion of immediate triumph. This is because of some basic scientific and economic realities.

First, the focus of scientists (and policy makers) is and should be on stabilizing concentrations at acceptable levels by 2050 and beyond, because it is the accumulated stock of greenhouse gas emissions — not the flow of emissions in any year — that are linked with climate consequences.

Second, the cost-effective path for stabilizing concentrations involves a gradual ramp-up in target severity, to avoid rendering large parts of the capital stock prematurely obsolete.

Third, long-term technological change is the key to the needed transition from reliance on carbon-intensive fossil fuels to more climate-friendly energy sources.

Fourth, the creation of long-lasting international institutions is central to addressing this global challenge.

Indeed, it would be easy, but unfortunate, for countries to achieve what some people wish to define as “success” in Copenhagen: a signed international agreement, glowing press releases, and related photo opportunities for national leaders. Such an agreement could only be the Kyoto Protocol on steroids: more stringent targets for the industrialized countries and no meaningful commitments by the key rapidly-growing emerging economies of China, India, Brazil, Korea, Mexico, and South Africa (let alone by the numerous developing countries of the world).

Such an agreement could — in principle — be signed, but it would not reduce global emissions and it would not be ratified by the U.S. Senate (just like Kyoto). Hence, there would be no real progress on climate change.

If it’s not reasonable to expect that a comprehensive post-Kyoto policy architecture will be identified in Copenhagen, what would constitute real progress? One important step forward would be a constructive joint-communiqué from major countries (just seventeen industrialized and emerging economies account for about 90% of annual emissions).

Such a joint-communiqué could lay out key progressive principles to underlie a future climate agreement, such as...: all countries recognize their historic emissions (read, the industrialized world); and all countries are responsible for their future emissions (think of those rapidly-growing emerging economies). ... Various policy architectures could subsequently build on these dual principles and make them operational, beginning to bridge the massive political divide which exists between the industrialized and the developing world.

In addition, a mid-term agreement could be reached on an approach involving an international portfolio of domestic commitments, whereby each nation would commit and register to abide by its domestic climate commitments, whether those are in the form of laws and regulations or multi-year development plans. Support for such an approach has been voiced by a remarkably diverse set of countries, including Australia, India, and the United States.

The key question is not what this approach would accomplish in the short-term, but whether it would put the world in a better position two, five, and ten years from now in regard to a long-term path of action.

Consistent with this portfolio approach, President Obama recently announced that the United States would put a target on the table in Copenhagen to reduce emissions 17 percent below 2005 levels by 2020 (in line with climate legislation in the U.S. Congress). In response, China announced that it would reduce its carbon intensity (emissions per unit of economic activity) 40 percent below 2005 levels over the same period of time. Subsequently, India announced similar targets. Given these countries rapid rates of economic growth, the announced targets won’t cut emissions in absolute terms, but they are promising starting points for negotiations.

So, despite the multitude of negative pronouncements about the slow pace of international climate negotiations, there are positive developments and promising paths forward. It is fortunate that a few key nations, including the United States, appear to be more interested in real progress than symbolic action.

Weekly Claims for Unemployment Insurance Increase Slightly

From Calculated Risk:

The DOL reports on weekly unemployment insurance claims:

In the week ending Dec. 5, the advance figure for seasonally adjusted initial claims was 474,000, an increase of 17,000 from the previous week's unrevised figure of 457,000. The 4-week moving average was 473,750, a decrease of 7,750 from the previous week's revised average of 481,500.
...
The advance number for seasonally adjusted insured unemployment during the week ending Nov. 28 was 5,157,000, a decrease of 303,000 from the preceding week's revised level of 5,460,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 7,750 to 473,750. This is the lowest level since October 2008.

Although falling, the level of the 4 week average is still high, suggesting continuing job losses.

Is this a momentary pause in a slow recovery, noisy weekly data obscuring the trend, or a sign that we are beginning to move sideways? Even if we aren't moving sideways, we aren't doing enough to help labor markets recover, so if we are moving sideways - surely a possibility - the policies that are in place are inadequate. We need to do more.

"How Have Quantitative Financial Models Been Used and Misused?"

A recent symposium on Financial models and financial innovation at Columbia University wonders "Why all the Fuss?":

Financial Models: Why All the Fuss?, by Catherine New: The research symposium “The Quantitative Revolution and the Crisis: How Have Quantitative Financial Models Been Used and Misused” at Columbia Business School on December 4 explored the causes and effects of the proliferation of quantitative finance. Donald MacKenzie, a professor of sociology at the University of Edinburgh, gave the keynote speech (PDF).

Professor Bruce Kogut, in his opening remarks, acknowledged that financial engineering and innovation have received an onerous rap in the fallout from the financial crisis. However, he suggested that the field was ripe for public debate.

“It might be easy to leap to the conclusion that the subtext of today is that financial models created the crisis and hence innovation is bad. But such a deduction is in fact deeply complex and largely suspect,” he said. “Why is there such debate over financial innovations? After all, innovation is a driver of economic growth and wealth, so why all the fuss?” Kogut suggested three possibilities, including the disparity between private and social value, unanswered questions about systemic risk and the speed at which innovation takes place.

Professor Paul Glasserman pointed to popular media portrayals, like WIRED’s “Recipe for Disaster: The Formula That Killed Wall Street” (Feb. 2009), which excoriated the financial industry’s use of models, as perpetuating misunderstanding about the uses and capabilities of quantitative finance.

“The article sets the record for the most incorrect statements packed into a title,” Glasserman said. “In a very short time there has been a dramatic shift in perception of quantitative finance.”

Glasserman moderated the panel “Does the Practice of Quantitative Finance Need to Be Changed?”...

Much of the panel’s discussion focused on when models are useful — and not useful — in financial markets. Derman, author of My Life as a Quant, led the discussion and offered a discourse on what models are and how they can be applied (download presentation PDF). He cautioned that there is never a “right” model but rather ”somewhere north of common sense and south of hubris lies the appropriate use of models.”

Beunza, formerly a visiting professor at the Business School, cautioned that the use of models is a “doubled-edged sword”; his research shows that they lead both to increased arbritrage and better reflexiveness.

Goldman Sachs’ research director Kent Daniel argued that models benefit many fields, such as airline safety, and not only financial markets. However, he cautioned that exacting data was fundamental to the use of models. “A successful quant model has to be subjected to every kind of scrutiny you have,” he said. “If your organization doesn’t do that, you’ll have a failure.”

There are important uses for financial products, even complicated ones, so I don't want to impugn innovation generally, but I also don't want to adopt the position that it was all useful - it clearly wasn't and stronger regulatory oversight is needed. As for the defense of financial models and innovation described above, the statement that innovation generally is the source of economic growth, therefore financial innovation must also be good, isn't much help. Similarly, if saying "models benefit many fields, such as airline safety, and not only financial markets" is the best defense of risk models available, that's telling.

[For those of you tempted to cite or that already have cited Paul Volcker's recent statement that ATMs are the only useful thing to come out of the financial industry in recent decades, I'd be more comfortable with your citing him as an all-knowing authority if you also adopted his position against auditing the Fed, and his position that the Fed ought to be the primary systemic risk regulator. But rather than listening to Volcker and others you have found to be trustworthy and wise in the past, many of you seem to find the arguments of people like Ron Paul and Jim DeMint compelling, and you have thrown your support behind their positions (something you'd be unlikely to do in any other context -- that alone ought to cause you to rethink this -- whose interests do you think people like DeMint are promoting?). If you get your way and congress, and by extension the financial industry, begins to have a strong influence over both policy and regulation, I hope you get the results you were hoping for. But I don't think you will.]

links for 2009-12-09

• The Basic Economics of Carbon Permits Versus Carbon Taxes - EconoSpeak
• Can Neoclassical Economics Accept Explicit Normative Priors? - Open Economics
• For Global Finance, Global Regulation - Gordon Brown and Nicolas Sarkozy
• New Deal 2.0 - links
• Marginal Revolution - links
• Market Talk - links
• Economix - links
• Free Exchange - links
• Abnormal Returns - links
• Brad DeLong - links

Krugman versus Bartlett on Job Creation

[The discussion begins at the 2:30 mark on the video. Source and transcript.]

The main issues they debate are whether another stimulus package is needed at this point, and if so, whether money allocated to the TARP program should be redirected to job creation.

The Administration’s Job Creation Proposal is Inadequate

At CBS MoneyWatch, a brief summary and evaluation of the president's job creation proposal:

The Administration’s Job Creation Proposal is Inadequate, by Mark Thoma: The president unveiled his job creation strategy yesterday, and it contains three main elements, tax incentives that encourage small businesses to hire more workers, more spending on infrastructure and other large projects, and rebates for consumers who invest in energy saving improvements for their homes (the so-called "cash for caulkers" program).

How will this program be financed? According to Robert Reich, the plan is to use $70 billion of the recent unexpected $200 billion in savings on the TARP program arising from new estimates of the program's cost.

This proposal is not very specific, and if it makes it through the legislative process it will likely change quite a bit. But as it stands there are three problems with it. First, it does not create jobs directly, all job creation occurs indirectly through incentives such as reduced capital gains taxes for small businesses, other measures that make investment cheaper, rebates for home weatherization, etc. The program relies upon people acting upon these incentives, which they may or may not do, and even if the incentives are acted upon job creation is likely to be slow due to its indirect nature. Second, the amount, $70 billion, is too small to make much of a difference given the size of the unemployment problem. Third, it's disappointing that one of the best job creation/preservation measures the administration could have proposed, more help for state and local governments battered by budget problems arising from the recession is not part of the proposal. [Summary of various types of job creation strategies]

We need more direct and more immediate job creation than this proposal puts forth, and we need a much larger job stimulus package to make a noticeable dent in the problem. The argument for the package as announced is that this is the most that the administration can possibly get, anything larger or involving direct hiring won't be politically feasible due to worries over the deficit and worries that direct hiring amounts to wasteful "make-work" (a view I disagree with).

Thus, given the meager size of the proposal and the manner in which it is structured, it seems that this is intended more for its political effects than for its economic effects. The attempt is to tell workers, small businesses, and others that the administration cares about them, it "feels their pain" to borrow a phrase from a previous administration.

But I think this strategy is a mistake both economically and politically. Economically, it leaves people unemployed who could be working and paying taxes, an unacceptable outcome given the struggles unemployed households face. Politically, if the administration and congress are going to do another stimulus package, it needs to be large enough to make a difference.

In the end -- which for a politician means the next election -- people won't care that Obama threw a speech and a few billion dollars their way, that he understood the difficulties they face. People want action, some demonstration that the administration understands the problem and has done what is needed to fix it, and measures intended purely for their political effect won't get us there. Perhaps the plan is to blame Republicans for preventing more aggressive programs if jobs are still a problem as the election approaches, but I don't think that will work, particularly since Democrats do not appear to be willing to fight tooth and nail for a larger package. If jobs are not forthcoming, it's the Democrats not the Republicans who will face the wrath of voters. [Permalink]

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"On the Consequences of Nominal Wage Flexibility"

Gary Becker and others have called for a cut in the minimum wage as part of the solution to the unemployment problem. This group believes that if markets are free to adjust, then they will clear, so any problem with involuntary unemployment must be due to some impediment to full market adjustment. What is the impediment? Becker and others assert that an important cause of Keynesian type downward wage rigidity is the minimum wage. The failure of wages to fall sufficiently fast in recessions is due in part to the presence of the minimum wage, and the wage stickiness creates an excess supply of labor (and hence, unemployment). The recommendation to reduce downward rigidity by cutting the minimum wage follows from this reasoning.

Rajiv Sethi explains why a fall in wages may make things worse rather than better:  

On the Consequences of Nominal Wage Flexibility, by Rajiv Sethi: With the unemployment rate hovering above 10% and likely to stay in this range for some time, there has been a lot of discussion about what (if anything) the government should do to stimulate job creation. Following a link on Greg Mankiw's blog, I came across Gary Becker's view of the matter:

Keynes and many earlier economists emphasized that unemployment rises during recessions because nominal wage rates tend to be inflexible in the downward direction. The natural way that markets usually eliminate insufficient demand for a good or service, such as labor, is for the price of this good or service to fall. A fall in price stimulates demand and reduces supply until they are brought back to rough equality. Downward inflexible wages prevents that from happening quickly when there is insufficient demand for workers.

As one might expect given his diagnosis of the problem, Becker goes on to "fully endorse" a cut in the minimum wage, but does not see this as being politically feasible at present.

I found this post striking for three reasons. First, it expresses a view that is actually quite widely held among economists today, namely that if nominal wages were flexible in the downward direction, involuntary unemployment could not persist for very long. This view is held even by many who would strenuously object on fairness grounds to a cut in the minimum wage. Second, Becker attributes to Keynes an opinion that is precisely the opposite of that expressed in the General Theory.  And third, there has been very little serious analysis of the consequences of nominal wage flexibility in an economy with involuntary unemployment. A notable exception is a 1975 paper by James Tobin that has been largely (and unjustly) forgotten. For reasons discussed below, Tobin's analysis does not support Becker's position.

Keynes did indeed assume for the most part that nominal wages were inflexible, but also maintained that wage flexibility would make matters worse rather than better: "it would be much better that wages should be rigidly fixed and deemed incapable of of material changes, than that depressions should be accompanied by a gradual downward tendency of money wages" (p. 265). This is the starting point for Tobin's analysis:

Keynes tried to make a double argument about wage reduction and employment. One was that wage rates were very slow to decline in the face of excess supply. The other was that, even if they declined faster, employment would not - in depression circumstances - increase. As to the second point, he was well aware of the dynamic argument that declining money wage rates are unfavorable to aggregate demand. But perhaps he did not insist upon it strongly enough, for the subsequent theoretical argument focused on the statics of alternative stable wage levels.

To drive this point home, Tobin builds a simple model with three dynamic equations: output adjusts in response to excess demand in the goods market, inflation (relative to expectations) adjusts in response to deviations of output from its full employment level, and expectations of inflation adjust adaptively in response to the difference between actual and expected inflation. So prices (and nominal wages) are fully flexible and there is no limit to how low these can fall if output remains persistently below its full employment level.

An equilibrium of this model is characterized by full employment, steady inflation, and correct expectations. But Tobin is less interested in the equilibrium behavior of the economy than in the dynamic adjustment process from an initial state of disequilibrium. He establishes that even if the equilibrium is locally stable, it need not be globally stable: if, for whatever reason, output drops far enough below its full employment level, then (as in Axel Leijonhufvud's corridor hypothesis) cumulative declines in employment and prices can result.  Instead of improving matters, the downward flexibility of money wages can prolong and deepen an economic contraction.

Tobin's analysis here is methodologically old-fashioned in the sense that no attempt is made to provide microfoundations for the postulated adjustment processes.  But the logic is compelling, and I am certain that with sufficient ingenuity, the argument could be expressed in more modern terms. In any case, it is no less convincing than the partial equilibrium Walrasian analysis of the labor market that has led some to prescribe lower nominal wages as a solution to our current woes.

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links for 2009-12-08

• BLS: Near Record Low Labor Turnover - Calculated Risk
• Commodity prices and the Fed - Econbrowser
• What Makes Cities Great - Ed Glaeser
• Life on Mars theory boosted by new methane study - EurekAlert
• Pre-Crisis Problems in Financial Institutions - David Beckworth
• The Psychology of Social Status - Scientific American
• Kick-starting the green innovation machine - voxeu.org
• Why the EU needs a border tax on carbon - voxeu.org
• Why China’s exchange rate policy concerns us - Martin Wolf
• Congress May Be Finding the Nerve to Cut Health Costs - NYTimes.com
• Q&A: Financial Innovation -- A Blessing or a Curse? - Fama/French Forum
• Non-Reform of Rating Agencies - naked capitalism
• The Stash - links
• New Deal 2.0 - links
• Economix - links
• Marginal Revolution - links
• Abnormal Returns - links
• Money Supply - links
• Economists Forum - links
• FT Alphaville - links
• Brad DeLong - links

"The President's Job's Initiative Doesn't Measure Up"

Robert Reich:

The President's Job's Initiative Doesn't Measure Up, by Robert Reich: Barack Obama is trying once again for balance. On the one hand, he wants enough government spending to offset the timid spending of consumers and businesses. Otherwise, the jobs and wage recession could drag on for years. On the other hand, he doesn't want to set off more alarm bells about the budget deficit. Otherwise, conservative Democrats might join forces with Republicans to block heath care. So what does he do? A little bit more stimulus spending, but stimulus spending that doesn't look like more stimulus because it's not really adding to the deficit. It's coming out of savings from money already authorized to be spent on the bank bailout. Hmmm?

No president in modern times walks a tightrope as exquisitely as this one. His balance is a thing of beauty. But when it comes to this economy right now -- an economy fundamentally out of balance -- we need a federal government that moves boldly and swiftly to counter-balance the huge recessionary forces still at large.

States and cities, for example, are estimated to be $350 billion hole this year and next. They can't run deficits so they're wildly cutting spending, cutting jobs, cutting contracts, and raising taxes and fees. That's a huge anti-stimulus package roughly as big as the remaining direct spending in the old federal stimulus package. Which means, Obama's "new" stimulus, announced today, is about all we have, and it's not nearly enough.

The word in Washington is we're out of the woods. The rate of unemployment dipped from 10.2 percent in September to 10 percent in October. In our nation's capital, a one-month trend marks a turnaround. Don't believe it for a moment. The real story of October was the increasing number of Americans who dropped out of the labor force, too discouraged even to look for work.

Main Street is hurting worse than ever. Ten percent unemployment translates into roughly 18 percent of our workforce unemployed or underemployed. Housing markets are in terrible shape... A quarter of all American children are now dependent on food stamps.

There is no reason to tolerate this degree of misery. We know exactly what to do. The government has the fiscal tools to do it. Start by bailing out state and local governments... Renew unemployment and COBRA benefits. Increase federal spending on infrastructure. If we have to, hire people directly. The package should be $400 billion over two years.

We don't know exactly how much the President is proposing to spend, but sources tell me it's in the range of $70 billion, redirected from the $200 billion in TARP savings. ... This isn't really balance at all. It prolongs the economic imbalance.

A jobs program that is too small is politically dangerous. If unemployment is still a big problem even after this program is in place, it will look like two separate programs -- which in their totality are not large enough to get the job done -- have failed to generate new jobs. That's not only costly in this recession -- people who could be employed won't be -- but it will also undermine the case for similar programs in the future. This removes an important policy tool from the government's arsenal, even though a jobs/stimulus program large enough to make a dent in the problem would likely work.

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The Relationship Between Budget Deficits, Fed Independence, and Inflation

At MoneyWatch, some of the pressures the Fed might come under in the future if the government debt continues to rise, and the important role that Fed independence plays in making sure that the debt is not inflated away:

Budget Deficits, Fed Independence, and Inflation, by Mark Thoma: I have been critical of both Alan Greenspan and Ben Bernanke for giving recommendations concerning fiscal policy during their testimony before congress. In Greenspan's case, it was his comments about tax cuts that I found problematic, while for Bernanke it was his comments on entitlements.

But monetary and fiscal policy are connected, and the Fed chair should talk about the impact that a growing debt level might have monetary policy. That is, while I don't think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. ...[...continue...]...