Weighing the Long Run Consequences

Willem Buiter has produced a rather long post on 10 Do's and Dont's for the current financial mess. It includes several very blunt assessments of the measures taken by governments to address the problems we're facing. Interesting stuff.

There are a couple of points I want to touch on. First, Buiter weighs in against the fiscal stimulus package idea - an idea we've been tossing around quite a bit on these pages. He argues that any immediate increase in public spending is difficult to do without being wasteful. The immediate retort is "wasteful compared to what?" But additionally, we still don't know the full extent of the costs of the crisis: G7 governments have already guaranteed enormous sums of money, and may have to continue doing so. Buiter thinks that introducing additional fixed spending is unnecessarily risky given the already-burdened government balance sheets. Fair enough.

His recommendation is tax cuts and transfer payments. In general, such measures would not be helpful because most consumers will simply take their check and pay off debt or stash it under the pillow rather than spend it and help stimulate the economy. But Buiter rightly suggests targeting "persons and businesses with high marginal propensities to spend out of current disposable income - households and firms that have short horizons and/or are liquidity-, cash-flow and current-disposable-income constrained." I'm not sure how easily that's done. For a pro-fiscal stimulus point of view, see Krugman's recent column.

Buiter's broader point is one that I fully agree with: let's take care of the long-run problems now. During a crisis, the immediate can overwhelm the important, but it is the responsibility of our political and policy leadership to keep an eye on the long-run. As Christopher Caldwell has pointed out, "The problems of 30 years from now will turn out to have been hidden somewhere in the parts of today's bail-out package that were most effective." Try ten years from now.

This crisis has provided the political space to make much-needed changes. As Larry Summers explains, just as the patient is more receptive to dietary advice after a heart attack, so it is with the financial sector during a crisis. Doing nothing in the short-run is not politically feasible, but throwing everything at the problem without regard to long-run consequences is trouble. Opportunities to implement creative long-run policy solutions do not come along very often - this one should not be wasted.