Stuck in Neutral

| Fri May. 21, 2010 9:01 AM PDT

Paul Krugman says the United States isn't in any danger of turning into Greece:

The truth is that policy makers aren’t doing too much; they’re doing too little. Recent data don’t suggest that America is heading for a Greece-style collapse of investor confidence. Instead, they suggest that we may be heading for a Japan-style lost decade, trapped in a prolonged era of high unemployment and slow growth.

.... It’s not that nobody understands the risk. I strongly suspect that some officials at the Fed see the Japan parallels all too clearly and wish they could do more to support the economy. But in practice it’s all they can do to contain the tightening impulses of their colleagues, who (like central bankers in the 1930s) remain desperately afraid of inflation despite the absence of any evidence of rising prices. I also suspect that Obama administration economists would very much like to see another stimulus plan. But they know that such a plan would have no chance of getting through a Congress that has been spooked by the deficit hawks.

In short, fear of imaginary threats has prevented any effective response to the real danger facing our economy.

That's true. But the core problem is that growing government debt is a problem in the long term. Ideally, then, what we'd do is gather support for a strong stimulus now by credibly promising to address our various fiscal imbalances in the future. But how do we do this? As far as I know, it's not possible. There's simply no way to guarantee future behavior in any way that the market would take seriously. So we're stuck.

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