‘We can’t inflate our way to prosperity’
“There is no other policy tool available [besides quantitative easing],”‘ Laura Tyson, a former chairwoman of the Council of Economic Advisors, said at this morning’s Reuters/YouTube live debate on how to fix the economy. Tyson argues that additional Fed purchases of long-term bonds is the most viable way to energize the U.S. economy since a new fiscal stimulus bill is unlikely to pass Congress:
She appears alongside Glenn Hubbard, another former CEA chairman, who maintains the Fed will spend another $1 trillion to lower rates by 20 basis points. “We can’t inflate our way to prosperity,” he said.
Tyson disagrees and thinks the risk to inflation is low. She admits we have to convince the rest of the world that the U.S. has no intention to inflate away its debt.
Their conversation then turned to China. Both agree that the increasingly fiery rhetoric Washington directs toward Beijing is counterproductive and that the U.S. is better served by enacting policies to reduce its trade deficit:
HUBBARD: If [the U.S. and China] both keep beating up on each other and try to beggar our neighbor, we’ll get into a very bad place. China does have a protectionist policy. It does have a mercantilist policy. And I think focusing on those things quietly rather than from the hilltops, as the administration is doing, would be the right answer.
TYSON: [the rhetoric towards China is] a mistake for them and it’s a mistake for us. … but I honestly think that, just like Glenn does, the exchange rate is not the issue here … frankly, I think we’ve seen much more of a sign that the Chinese are rebalancing and restructuring than we’ve seen in the United States so far. [...]
HUBBARD: [If you focus] on export led growth, you’re guaranteeing, at some point, to have a large financial crisis, because you’re building up a lot of negative net present value projects in China.
As for a second fiscal stimulus, Tyson said the U.S. should spend $1 trillion on infrastructure over the next five years. She thinks direct aid to states should be a priority at a time when 25% of the nation’s children live in poverty and state and local governments are forced to lay off 88,000 teachers because of budget shortfalls.
Surprisingly, Hubbard conceded that a second stimulus would be helpful, but said it should only take the form of investment incentives and a mass refinancing of mortgages held by Fannie Mae and Freddie Mac. While infrastructure spending could be stimulative, he says shovel-ready projects are few and far between.
Posted by Peter Rudegeair