At Cornell University (and the majority of other universities and colleges in North America) introductory macroeconomics is taught with the idea that the government has the power to influence economic stability and outcomes in terms of output, unemployment, and inflation. Students learn that while long-run economic growth depends on things like resource endowments, technology and the efficiency with which these are all combined, short run outcomes can fall considerably short of what we might like to see. Indeed, history has examples of depressions lasting 10 years or more and though some might argue there is little to be done about them, at least on a year-to-year basis, most would agree that the actions of the Federal Reserve in terms of interest rates and the executive and legislative branches in terms of fiscal stimulus (or lack thereof) can have a powerful effect in the short to medium term.
It does not seem that there is much more monetary policy can do at the moment, especially with interest rates near zero at the short end and at 50 year lows at the long end. While there is indeed a long-term deficit problem, 10 year interest rates below 2% are prima facie evidence that the "bond vigilantes," if they exist, are not worried about the United States. Indeed, if the "confidence fairy" is active in our neck of the woods she seems to have sprinkled some fairy dust on our bond markets given the level of interest rates. And regulatory reform has been pursued with gusto for more than a decade, starting with the repeal of the most constraining financial regulations in 1998. Sure, businesses would like to see regulations repealed but can this really explain why unemployment rose to double digits in the wake of the financial crisis and has stayed stubbornly high ever since?
Given all this, an intro Econ student would almost certainly be asking "What about fiscal policy? What are we doing to create jobs directly or at least generate enough aggregate demand to inspire businesses to ramp up production?"
Will we hear anything like this out of the GOP debate on the economy? Or will we see a competition to see who can propose the most contractionary policy possible? Or will they instead focus on things that might be fine ideas but won't make a dent in the millions who are out of work?
Stay tuned but don't hold your breath. My own message to them is that there are still a few empty seats in my lecture hall — they are welcome — they might learn something useful in case they ever get to be president.
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