Mark Thoma posts this graph


In early 2008 I said

Inflation is here, yes. Commodity prices in general and agricultural prices are skyrocketing. This is something that we talked about here last year. However, the Japanese Scenario is becoming more salient everyday.

As I say regularly to my colleagues, “This is not just sub-prime, this is not just housing. This will get much worse before it gets better.”

The reason I point this out is that the basic path of the recession was totally foreseeable if you paid attention to the incoming data on liquidity demand.

This is key because we are now engaged in a great debate on how to get out of this crisis. I maintain that the type of analysis that foresaw a crisis of this exact nature coming should be given extra weight.

If the people who were saying in early 2008 that a severe liquidity crisis was brewing were correct, shouldn’t this at least raise somewhat the general estimates that resolving the liquidity crisis is the key to growth.

I know there are a lot of people who point to federal government policy uncertainty. Who knows what Obama might do? However, policy uncertainty didn’t predict the crash while liquidity concerns did.

As such I strongly suggest that those who are committed to bringing us out of recession focus their attention on liquidity.

That having been said there are numerous ways of dealing with this:

1) Obviously I have pointed to higher inflation targeting. I am still a big fan of this and I think at the core a credible promise to induce inflation is the ultimate key.

2) I endorse QE 2. Like many I am skeptical of why the Treasury couldn’t just buy up all of our long term debt, issue T-bills and receive the same benefits. However, if it serves as a communication device that the Fed is serious about reducing long term rates then I am for it.

3) Tax cuts. I know for many of my liberal readers this is increasingly becoming a bad term. However, the point is not whether we concede to a so called “republican” idea, the point is whether we reduce unemployment for those in need.

I have argued and will continue to argue if that for some reason, that I don’t completely understand, the markets fail to take the Fed seriously we still have the option of injecting large amounts of liquidity quickly through tax cuts.

Please, lets not get hung up on whether tax cuts are an excuse to hand out money to the rich. We can cut payroll taxes. We can even provide a payroll tax credit where you get back the first 5000 your family paid in payroll taxes.

I am indifferent to the structure. What matters is that we get funds into the hands of consumers. What matters is that we end the liquidity crisis and reverse the upward trend in unemployment.

I know that you would prefer infrastructure, but every day we wait is another day that many of our citizens go without a job. Lets act quickly, boldly and in accordance with the experience and models that we have available.

It might be nice if we figured out a complex dignity voucher, skill building program that retrains Americans for a new service based economy. However, of primary importance is that the millions of Americans who are desperately looking for gainful employment find it.

We have the power to accomplish this. However, to do it we must lay down our partisan shields and accept any means necessary for moving us out of the liquidity trap.

Unless there is a macroeconomic reason you believe they will fail, please endorse tax cuts as an option.