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  • Sorry, Janet Yellen, We Can’t Spend Our Way to Prosperity

    In spite of aggressive expansionary Federal Reserve policies and several rounds of fiscal stimulus since 2007, the U.S. economy has yet to take off. Nonetheless, some officials are refusing to give up and even explaining to the public exactly how these Keynesian stimulus policies will (eventually) work. In a Time interview to be released on January 20, new Fed chief Janet Yellen explains:

    Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of the [economic stimulus] comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.

    Lowering interest rates is supposed to induce people to spend instead of save. Then, as home and stock market values rise, we are supposed to get the Keynesian wealth effect—people feel wealthier, so they spend more money. Anyone who wants to save money to build their wealth will just have to wait until the economy recovers. Of course, according to this logic, the economy will slow down when people stop spending, but that’s in the long run, so ignore that.

    But this is the wrong approach. The idea that saving is bad is flat wrong—and policies designed to kill saving do more harm than good. The fact that the Federal Reserve has been unable to get the economy to take off after six years of expansionary monetary policy—against a backdrop of virtually unprecedented expansionary fiscal policy—should be all the proof anyone needs.

    Consumption and saving should be determined by the market, not by arbitrary government decisions. The notion that some policymakers know exactly what these measures should be in the aggregate is just as ridiculous as the idea that we can spend our way to prosperity without producing goods and services that people value.

    Posted in Economics, Front Page [slideshow_deploy]

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