Scrambling for solutions

This article in VoxEu reminded me of this recent post by Lars Christensen who referenced an earlier post by Scott Sumner. From Scott:

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They new that monetary policy could reflate.  And yet . . .

The Vox article shows a graph of constructed economic uncertainty index together with a constructed policy uncertainty index, concluding that it is not always true that economic uncertainty breeds policy uncertainty, and that policy uncertainty is stalling the recovery.

Noticeable in the figure is the rise in both economic AND policy uncertainty in the last 10 years. This rise has become even more pronounced in the last few years (since the start of the “crisis”). One reason behind that observation is the fact that bad policy, in particular bad monetary policy let the economy fall into a deep (by post 1930´s standard) hole. In that situation economic prospects become more nebulous so politicians, always with an eye towards elections, “scramble for solutions”. How many “jobs plans”, for example, have been proposed?

And all the while, the “magic wand” is right there to be used. But those who hold the “magic wand” – the people at the FOMC – decline to put it to work. According to Lars, this is “practicing Calvinist economics”, where past “sins” have to be atoned for, not “simply forgiven”. So inside the “hole” we remain.

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