The Economist on Timidity in Government and Slow Recovery

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The Economist looks at the slow recovery in the US and concludes that fiscal policy and monetary policy were too weak for the depth of the problem. Obama's top economic advisers proposed a more substantial fiscal stimulus. Larry Summers even claims that it was impossible for the stimulus to be too big. A faster recovery would have increased tax revenue, that would have paid for the stimulus. It turned out the political team at the White House determined the level of stimulus that it could hope to get out of Congress.

The Fed cut interest rates as much as it could and it made the decision to purchase longer term treasuries and GSE securities in order to keep mortgage interest rates down. This helped the troubled banking system by enabling it to earn its way out of insolvency. It also prevented a deflationary spiral. Recent statements coming from the Fed suggest that its mission has been accomplished. High unemployment and slow economic growth are less of a priority.

It turns out that the problems in the US are with its political institutions. Fiscal policy and even monetary policy have been limited by political resistance. The political resistance was magnified, in my view, by popular reaction to the bailout of Wall Street. The GOP was able to pin the bailout on the White House and to use it to fan the flames of anti-government sentiment which has been responsible for the timidity that we have seen coming from the White House and from the Fed.