The Foundry

New York University economics professor Mario Rizzo kicks off the second morning panel “Market-Based Solution.” He begins by taking fire at the macroeconomists who are claiming they know exactly how many jobs each version of Obama’s Trillion Dollar Debt Plan will create. Rizzo says:

Unfortunately, much of the policy advice offered recently by commentators, including many economists, is shockingly superficial. It is reminiscent of the simple prime-the-pump ideas of the early Keynes and does not acknowledge Keynes’s own cautions and qualifications after the General Theory was published.”

Rizzo then went onto stress that the microeconomic realities were the key to real economic recovery: “I wish to emphasize the resource allocation issues that characterize both the current situation and its underlying causes. The macroeconomic way of thinking ignores the complexity of our system and generates policies that will not bring lasting recovery.”

Turning to solutions, Rizzo recommends:
First, allow the market adjustments to take place. When economic agents are confident that prices will be allowed to equilibrate, they will begin to take action in both financial and economic areas.

Second, the current atmosphere of uncertainty has created an increase in a reluctance to lend, borrow, invest, and consume. Neutral stimulation can do some good. The only way stimulation can be neutral is through tax cuts, because only they encourage economic activity in accordance with voluntary decisions of economic agents.

Temporary cuts like the one in Obama’s plan will not work just like the rebates in Bush’s 2001 tax cuts do not work. Permanent and across the board cuts are needed and a cut in the corporate tax rate would be the most helpful.

But these tax cuts must come with credible commitments to cut back on future government spending or they stimulative effects will be canceled by expectations of future interest rates.