QUINN MILLS HARVARD UNIVERSITY STEVEN ROSEFIELDE UNIVERSITY OF NORTH CAROLINA AT CHAPEL HILL
BACKGROUND IN THE DEVELOPED ECONOMIES
DECADES OF A DAMPENING BUSINESS CYCLE SECULARLY SLOWING GROWTH RATES
A MAJOR TRANSITION
THE DEVELOPED ECONOMIES ARE NOW
ENTERING A PERIOD OF SIGNIFICANT ECONOMIC FLUCTUATIONS
RECESSION AND DEFLATION
TO AND BACK AGAIN
INFLATION
CAUSES OF THE TRANSITION 1
INAPPROPRIATE MONETARY POLICY INTEREST RATES TOO LOW TOO LONG THEN SUDDENLY RAISED AT THE WRONG TIME TOO RAPID GROWTH IN MONEY SUPPLY INAPPROPRIATE REGULATION OF FINANCIAL SECTOR
TOO HIGH LEVERAGE RATIOS INAPPROPRIATE LENDING STANDARDS LOANS FOR SPECULATION SUBPRIME LOANS
YIELDED A FINANCIAL CRISIS
CAUSES OF THE TRANSITION 2
INAPPROPRIATE FISCAL POLICY EXCESSIVE GOVERNMENT SPENDING EXCESSIVE GOVERNMENT DEFICITS EXCESSIVE BORROWING UNDERSAVING IN THE US DESTABILIZING POLICIES SUCH AS SUBSIDIES FOR SUVs, TAX BENEFITS FOR HEDGE FUND MANAGERS OVERSAVING IN DEVELOPING WORLD FINANCIAL IMBALANCES IN WORLD TRADE
ROOT CAUSES OF MONETARY POLICY ERRORS 1
INABILITY TO IMPLEMENT POLICY FED POLICY IS TO USE MONETARY AGGREGATES TO INFLUENCE ECONOMIC PERFORMANCE (MONETARISM OR FRIEDMANISM), but FED CANNOT ACCURATELY MEASURE MONEY SUPPLY AGGREGATES, due to
EMERGENCE OF NEAR-MONEY INSTRUMENTS INADEQUATE DATA due to INADEQUATE REPORTING BY FINANCIAL INSTITUTIONS OF VARIOUS TYPES (ESPECIALLY HEDGE FUNDS)
ROOT CAUSES OF MONETARY POLICY ERRORS 2
POLITICAL INSISTENCE ON REDUCED REGULATORY STANDARDS
IN THE US BY REPUBLICANS AS A MATTER OF IDEOLOGY BY DEMOCRATS AS A MATTER OF POLICY BY BOTH AS MATTERS OF FUND-RAISING (SEE ESPECIALLY THE FAILURE TO ADEQUATELY REGULATE THE US MORTGAGE-MARKET GOVERNMENT-RELATED FIRMS – FANNIE MAE AND FREDDIE MAC)
INCORRECT ANALYSIS OF ECONOMIC SITUATION
INABILITY TO DECIDE WHETHER THE PROBLEM IS INFLATION OR DEFLATION
ROOT CAUSES OF FISCAL POLICY ERRORS 1
WISHFUL THINKING – THE EXPECTATION THAT
ALL POLITICAL CONSTITUENCIES CAN BE ACCOMODATED WITHOUT MAKING CHOICES THAT BURDEN SOME OR REDUCE THE WELFARE OF THE WHOLE COUNTRY ERROR OF FISCAL POLICY THEORY
KEYNESIAN ANALYSIS AND RESPONSE ISN’T APPROPRIATE IN THE HIGH EMPLOYMENT CONTEXT (UNEMPLOYMENT RATES ARE LESS THAN 10% NOT GREATER THAN 20%) -- MASSIVE GOVERNMENT SPENDING STIMULUS IS INAPPROPRIATE
ROOT CAUSES OF FISCAL POLICY ERRORS 2
DIVERSION OF THE FISCAL POLICY INSTRUMENT
TO PRIMARILY POLITICAL PURPOSES
KEYNESIANISM TODAY IS MERELY A RATIONALE FOR OVERSPENDING, FOR WHAT AMERICANS CALL PORKBARREL OR INTEREST GROUP POLITICS; in consequence FISCAL POLICY IS NO LONGER AN ECONOMIC POLICY BUT IS NOW A POLITICAL MECHANISM AS A RESULT FISCAL POLICY NOW HAS A DANGEROUSLY EXPANSIVE BIAS