Donnerstag, 19. Mai 2011

Interview: Prof. Tim Duy, University of Oregon

Tim Duy is a Professor of economics and director Oregon Economic Forum, Department of Economics, University of Oregon.

Regarding the vacant seats at the Fed: What qualities are the new members of the Federal Reserve supposed to bring particularly in order to tackle the problems in the aftermath of the financial crisis?

My largest concern at the moment is the possibility of an effort to fill the current vacancies with individuals ideologically-biased toward “hard money.”  There is already an internal bias toward normalizing the Fed’s operations as soon as possible via a reduction of the balance sheet despite the acknowledged high rates of unemployment and large output gaps.  I think it would be an error to try to pack the Fed with persons committed to accelerating the pace of that process regardless of the current state of the economy – it risks repeating the mistakes of 1937, when policy turned contractionary prematurely.  Instead, I would prefer candidates who can be flexible, willing to withdraw monetary accommodation when necessary, but not predisposed to immediate, aggressive action.  Ideally, they would also be well-versed in theoretical and empirical macroeconomics and/or the activities, structure, and regulation of financial markets.  It seems pretty apparent at this point that the latter skills are likely to play a greater role in policymaking in the future.

What do you expect to happen, when the Fed ends its controversial bond-buying program (QE) in June?

I believe that financial markets will easily adapt to the Fed’s absence – that the Fed’s exit will not be disruptive. 

What went wrong with stimulus? Why does unemployment remain so high?

I don’t think anything “went wrong” with the stimulus, other than it simply wasn’t enough to fill the depth of the economic hole caused by the recession.  There was simply a lack of political willpower to fully acknowledge the depth of the problem and bring to bear the appropriate resources.  The result is an economy that is not bouncing back quickly enough to close the output gap and create sufficient job growth to drive the unemployment rate down lower at a faster pace.

Is the economy not weak enough to justify more stimulus ? Or do policy makers think that deficit spending are not able to generate more jobs?

Yes, the economy is weak enough to justify additional stimulus, and the persistently low rates of government debt should prove that current fears of deficit spending are unjustified.  Some policymakers appear to believe that a commitment to fiscal austerity will in fact generate more job growth, but this is nonsensical – austerity would only aggravate the existing challenges (as it has in Greece).  There is currently no constraint that prevents more fiscal stimulus from being effective in promoting additional economic growth.  Longer run, yes, the US federal budget does need to be addressed, but letting growth stagnate now will only intensify that challenge in the future. Policymakers, however, appear enamoured with the idea that this challenges need to be addressed now, and this attitude poses another risk to the recovery.

Thank you very much.

Tim Duy is the Director of the Oregon Economic Forum and the author of the University of Oregon Index of Economic Indicators. He worked in Washington, D.C. for the US Department of Treasury as an economist in the international Affairs division and later with the G7 Group, a political and economic consultancy for clients in the financial industry.

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