The US Economy Needs a Kick-Start
Posted at noon on Dec. 12, 2012
Ryan Avent looks at what it would take to bring the US economy out of the current sluggish recovery.
“The economy is in an expectations trap, in which growth in the present is slow because growth in the future is expected to be slow. A change in the trajectory of recovery can only occur when markets expect growth to be faster in the future and adjust their behaviour in the present accordingly. The question is: what sort of change in economic conditions will generate such a shift?”
“Surprisingly loose fiscal policy is one option. Surprisingly robust external demand is another. A third, however, is a surprise change in monetary policy. Maybe Washington’s elected leaders will arrive at a benign fiscal deal and the way clear of the expectations trap will be open. If not, the Fed will have to decide whether it would rather sacrifice its sacred cows or accept current employment and growth trends as the best the economy can ever hope to do.”