Chrystia Freeland

“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

U.S. monetary policy is flooding the world with cheap liquidity, Nobel Prize-winning economist Joseph Stiglitz said at the Canadian Consulate’s “Invest in Canada” luncheon yesterday. Our current policy, he explained, acts as a competitive devaluation against emerging-market currencies. Stiglitz added that he is worried about the prospect of a currency war but conceded that there’s not anything we can do about it.

Stiglitz went on to say that what the Fed is doing is not so different from China’s interventions in the foreign-exchange markets and accused the U.S. central bank of undermining global financial market integration and only acting out of a sense of guilt:

The Fed, having created the problem in the first place, feels guilty and says, ‘We should do something to get us out of the mess.’ [...]   [Emerging markets] see this as competitive devaluation of the United States.  We say, ‘No, no.  We’re not engaged in competitive devaluation.  That’s something China does.  We don’t do those kinds of things.  We don’t manipulate our currency.  All we do is ordinary monetary policy.’  But the consequence of ordinary monetary policy is competitive devaluation.

Appearing alongside Stiglitz was BMO chief economist Sherry Cooper, who forecasted that the U.S. would see moderate growth of 2-2.5 percent in the second half of 2010. She was encouraged by recent indications that the deleveraging process for households and businesses is beginning to slow, but noted that that would not be enough to restore job growth. “Fiscal stimulus is essential,” Cooper said. She thought no new government spending in the U.S. would be passed, though, as deficits have become the focal concern of Washington, even as the Treasury is able to borrow at rock-bottom rates.

Stiglitz weighed in that it was a “total mystery” to him why the Democrats are not pursuing fiscal stimulus. “I am disappointed,” in President Obama, he said. In his view the Republicans’ invoking the language of deficits “captured the public’s mind.” Ultimately, he thinks that efforts to downsize the government by reducing deficits will backfire as the slower growth will shrink tax revenues and necessitate more government borrowing to keep basic services running.