Structural Reform Goes Better With Stimulus

A blog about business and economics.
May 14 2013 2:19 PM

Structural Reform Goes Better With Stimulus

This guy used to be Prime Minister of Italy, but the ECB doomed him.


I'm a little unclear on exactly what Steven Pearlstein has in mind when he writes about "austerity" but he seems to be driving toward the idea that stimulus can be harmful because a stimulus-induced growth boost will undermine political will to enact structural reforms.

My suspicion is that such concerns frequently motivate critics of stimulus, but I think it's a somewhat confused idea. One particular concern is that it becomes difficult to separate high-minded concern for the long term with simple partisanship. Lots of economists I read, for example, very strongly and very sincerely believe that Barack Obama's efforts to secure health insurance for poor people is disastrous long-term economic policy. If that were true, then it would also be the case that having the Federal Reserve tank the economy in 2012 would have had beneficial long-term implications ofr the American economy via the causal mechanism of electing Mitt Romney. But for better or for worse nobody seemed willing to openly call for Bernanke to have the FOMC target the 2012 election results with monetary policy. Lots of people who had strong feelings about the 2012 election results were unwilling to explicitly talk about how this was influencing their thinking on macroeconomic stabilization, so we got a lot of sublimated commentary and muddled thinking.


But this kind of consideration can point in different ways. Like most outside observers, I thought Mario Monti's structural reform program for Italy was a good idea. But it ended in catastrophic failure because Monti was proceeding over a total economic disaster. Contractionary short-term policy didn't boost support for reform, it undermined support for the incumbent.

It's important to try to think of a workable, non-partisan strategy for mixing the structural and the cyclical. The best thing, I think, is to empower central banks to conduct helicopter drops and give them exclusive domain over macroeconomic stabilization policy. The job of the central bank is to ensure adequate demand. The job of the parliament is to channel as much of that demand into real output (rather than price inflation) as possible. The key advantage of this approach is that the proof will be in the pudding. Policy reforms will either have the intended result of limiting price increases or else they won't. Citizens and observers will still argue about which ideas are the good ones and which are the bad ones, but central bankers won't be asked to guess in distinguish in advance. Political pressure for reform will come from the bottom-up, and it'll come for the very sensible reason that voters hate price inflation and will want elected leaders to implement effective supply-side policies to minimize it.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

160 Countries Host Marches to Demand Action on Climate Change


Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Sept. 20 2014 11:13 AM -30-
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Tv Club
Sept. 21 2014 1:15 PM The Slate Doctor Who Podcast: Episode 5  A spoiler-filled discussion of "Time Heist."
Brow Beat
Sept. 21 2014 2:00 PM Colin Farrell Will Star in True Detective’s Second Season
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.