Are fiscal and monetary policy enough for economic recovery?
The following originally appeared on TradeReform.org.
Without a national strategy to produce more of what we consume, the U.S. cannot recover.
Greg Tassey is Senior Economist at the NIST (National Institute of Standards and Technology). NIST is one of the few federal agencies focusing upon improving U.S. industry directly. The Manufacturing Extension Partnership, agricultural Cooperative Extension, etc. perform similar direct service functions to improve production in the U.S.
Germany’s Fraunhofer Gesellschaft is a much more intensive and well funded instrument of applied (not basic) research – i.e. research that solves real, practical problems. Japan’s METI (Ministry Economy, Trade and Industry) is even more powerful in areas of industrial policy, applied research and directing investment. When we see Japan and Germany doing well with production, capturing supply chains of major industries, and becoming net export powerhouses, these agencies have a substantial role in their successful nationalistic strategy.
I give this background because Tassey is much closer to the remnants of U.S. industrial policy than Tim Geithner – who thinks about monetary policy – or Paul Ryan, the House Budget Committee chairman – who thinks about fiscal policy (taxes and revenue).
In a recently released paper (Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy), Tassey argues that the U.S. can only recover if we focus upon investing and producing more. And that monetary and fiscal policy, without more, cannot work. He states, in summary…
The serious decline in growth prospects for western economies has naturally led to a massive debate over the causes and hence possible solutions. The media are full of assessments of the two major instruments traditionally used to restart economic growth: monetary and fiscal policies. Thus, the debate is over what type, how much, and for how long should interest rates be kept low, quantitative easing continued, tax incentives increased, and deficit spending maintained.
The attached paper argues that this almost total reliance on “macrostabilization” policies is misplaced and will not restore acceptable rates of economic growth. Instead, a growth strategy needs to be adopted that significantly increases long-term investments in productivity-enhancing assets, in particular, technology, skilled labor, plant and equipment, new types of technical infrastructure, and efficient institutional formats. The reasons this is not happening are twofold: (1) such assets will take a relatively long time to accumulate to levels necessary to undo decades of neglect, which requires investment discipline and staying power; and (2) traditional economic growth philosophies largely ignore the complexities of modern technology-based economic growth, which is resulting in multiple underinvestment scenarios.