By Mario Seccareccia
Professor of Economics, Ottawa University
Editor, International Journal of Political Economy
July 23 —
Over the last couple of months, especially as there have been some signs of economic â€œgreen shoots,â€ there have also been growing pressures coming from conservative policy analysts that the Obama administration ought to be planning its â€œexit strategy,â€ that is, a plan that would eliminate the deficit over the medium term.
These pressures are based on fears that the large federal deficit, standing at 13.1 percent of GDP, together with the huge reserves that are sitting within the banking system as a result of the Fedâ€™s monetary policy of quantitative easing, will soon metamorphosize into runaway inflation. Just recently, Fed Chairman Ben Bernanke added his voice to the chorus of those who are calling for an exit strategy.
Politically, all of this talk of exit strategy has served to weaken the Obama administrationâ€™s capacity to get important legislation passed. For instance, these fears of the deficit bogey have recently prompted the president to commit himself not to sign on to legislation that will add to federal deficits over the longer term.
Such stark commitments will only tie his hands politically and give credibility to a conservative policy view on the negative consequences of deficits that has been completely disproved by the facts. For instance, under the Bush administration, when unemployment rates were much lower than they are presently, we saw a rate of inflation that sat steadily at low levels, despite growing deficits. Moreover, Chairman Bernanke knows fully well that there is no positive relation between the volume of excess reserves in the banking system and credit expansion. The latter is driven by demand from creditworthy borrowers and not by the volume of excess reserves sitting in the banking system. Hence, the real fear should not be inflation but growing unemployment and wage deflation.
All of this talk of exit strategy has served to divert attention from the really important problem of rising unemployment whose official rate may well surpass the double digit threshold soon. Fortunately, there are some connected with the administration who are leery of this talk of exit strategy. For instance, in an article last month, Cristina Romer, chairwomen of the Council of Economic Advisers and scholar of the 1930s Great Depression, recounts how a similar debate over fears of inflation under the FDR administration led to both restrictive monetary and fiscal policies that engineered a second severe slump in 1937-1938 almost a decade after the 1929 crash. Romer cautions that such errors should not be repeated.
It is hoped that clearer heads will prevail in the current administration and that policy will remained focused on combating unemployment. What is needed is not an exit strategy but a full employment strategy. An exit strategy could abort a recovery and could mean that those green shoots will quickly dry up. As Paul Krugman so correctly pointed out in a recent op-ed: â€œgovernment deficits â€¦ are the only thing that has saved us from a second Great Depression.â€
Roosevelt Braintruster Mario Seccareccia is editor of the International Journal of Political Economy.