Fiscal vs. Monetary Policy

I’m no economist, but I find the current pursuit of policies designed to reverse our economic nosedive fascinating.  In supporting the PR efforts of Columbia Business School and editing various opinion pieces, I have found that the range of innovative ideas (particularly on the housing front) is broad and seemingly limitless.  But that fountain of ingenuity also makes the policy choices so complex. 

As Pres.-elect rolls out the parameters of his recovery program, I’m struck by the resulting debate on the merits of both monetary and fiscal policy.  To date, led by Treasury Secretary Paulson and Fed Reserve Chairman Bernanke, the focus has been on monetary policy as the government liquidity spigots are now wide open.  To be sure, there’s a lag in the effect of such moves.  Let’s hope that the resulting increase in the money supply also translates to an increase in money velocity (the average frequency with which money is spent) and more widely available credit.  We’re far from reaching the latter two objectives.

 In the wake of such monetary policies, we’re now seeing the Keynesian economists coming into vogue, pushing fiscal policy-driven initiatives (over monetary-based solutions), and the resulting government spend likely will be enormous. 

 Amid the economic debate, comparisons increasingly are being made to FDR’s efforts to reverse the banking crisis and spur economic activity during the early 1930s.   (Justin Fox of Time magazine notes, interestingly enough, that FDR followed a plan created by Hoover’s Treasury Secretary to solidify the banking system.  FDR simply had the courage to try something and looked for creative ideas wherever they resided, while Hoover struggled with analysis paralysis.)

 I’m a fan of the huge stimulus package being unveiled by Obama.  The situation is so dire, it commands grand action.  However, I’m struggling with how the impact of government spending (if focused on traditional infrastructure projects like roads and bridges) translates to today’s economy.  Obviously, today’s service-based economy is vastly different from the industrial-based economy that FDR faced.  That’s why the debate over not only how much the government spend will be, but also where and on what, is so interesting (and crucial).  Should it be on research, renewable energy, bridges, roads, national parks, education, IT (e.g., broadband), manufacturing, jobs training? 

The next few months will be fascinating to watch because our long-term economic health is in the balance.  At least I’m getting the sense that Obama (like Bush over the last few months) will follow FDR’s lead in being aggressive in at least trying a number of options to see what works.