Today's issue of The Wall Street Journal has an interesting piece in the Review and Outlook editorial. In it, the author seems to berate Fed Chairman Bernanke for endorsing fiscal policy as a method of providing stimulus. The author resurrects a quote from then President Richard Nixon about "we are all Keynesians now," and proceeds to explain how spending programs and tax cuts must be made up some how. I must admit, I thought the tone was more of a stern lecture than explanation, but I'll come back to that. The author also notes the political pressure on the Fed to further ease monetary policy in response to the mortgage "crisis" (quotes are mine). Then the specter of 1970s style stagflation is raised prior to concluding that monetary policy alone cannot spur economic growth, while doubting whether or not genuine stimulus is forthcoming from fiscal policy.
Let me say, that I too doubt whether or not Congress can come up with any meaningful policy, especially in a year in which most of its members are running either for current office or to keep their jobs. For any of them to campaign on how they will get the economy moving again when they're elected - nine plus months away - or more importantly when they're inducted into office - add two more months - seems to me to border on the absurd. The period of slow economic growth referenced by Chairman Bernanke is in the more immediate future. And it is here that I would take issue with the editorial.
I do not claim nor would I ever claim to know the Chairman's mind. However, I do claim to be an economics teacher. And if one is going to lecture, the students need to be taught about the advantages and disadvantages of monetary and fiscal policy. I for one teach that while monetary policy can be enacted quickly, the lag before it reaches full impact can be significant. Indeed, it is likely that interest rate cut first enacted in September 2007, still hasn't fully worked its way through the economy. I also teach that, on the fiscal policy side, changes can have faster impact. Changes in spending and, more significantly for this case, tax policy can be immediate. But the disadvantage is that the political process, which is designed to foster deliberation, tends to slow things down. When I worked for the Fed, one of the lines I heard from time to time was that "you could always tell when a recession was over because that's when Congress passed a stimulus package." The point was that process and the politics often took longer than the recession. I suspect that Chairman Bernanke, being the excellent teacher he is, recognizes this. And I suspect further that his comments to Congress were meant to try to shorten the time it would take to get the policy enacted. In this he should be recognized for his pragmatism. He knows that for fiscal policy to be of assistance in the current situation, Congress cannot wait for the elections to sort things out. He knows the disadvantages of monetary and fiscal policy. Whether or not anyone does is another matter.
Regardless, I think the current debate about stimulus is an excellent forum to teachers to discuss such things as monetary policy, fiscal policy, the business cycle, and the role of government. Season your daily lesson tidbits with a bit of reality, and it becomes a savory dish for your students' consumption.
The folks over at Aplia Econblog have some interesting classroom insights for follow-up.
I look forward to your comments.