de Long – so Wrong

If the solution to the fiscal and economic woes of the US could be found by simply adding more words of advice, then everything would be fine and dandy.

US academic economists have been having a field day providing us with their wisdom in terms of policy responses to the fiscal cliff.

I stumbled upon this one from Brad de Long, University of California, Berkeley.

First, Republicans and Democrats must negotiate a bipartisan agreement to stretch out the spending cuts and tax increases that take effect on January 1, 2013. That way, they will affect the economy gradually over five years, rather than all at once.

Second, the Federal Reserve should expand its quantitative easing and forward guidance programs. Consumers will be spending less in 2013, owing to higher taxes, as will government, which means that someone has to be spending more. Housing construction and exports are the obvious candidates, and both can be boosted somewhat by more aggressive balance-sheet operations by the Fed, together with promises of continued low nominal interest rates and higher inflation in the medium term.

Third, the large government-sponsored mortgage enterprises, Fannie Mae and Freddie Mac, should be used as macroeconomic-policy tools to restore housing construction to its long-term trend level. This should have been done five years ago, but better late than never.

Finally, and also five years too late, the US Treasury secretary should announce that while the strong-dollar doctrine was appropriate (and in America’s interest) during the dot-com boom, the country needs a weak dollar in the aftermath of the austerity bomb’s detonation.

Wow, I thought, particularly the idea of using Fannie and Freddie as macroeconomic policy tools.  Is he having a lend?

What ever happened to some straightforward common sense – aggressively restore fiscal balance, particularly through paring back unaffordable entitlement programs; start to pay back government debt; embark on a range of deregulatory microeconomic reforms which keeps the government out of private decision making; and ensure that the Federal Reserve independently targets low inflation and leave it at that.

The US – the land of free enterprise? What a joke.