Chris Edwards of the Cato Institute has come up with a nice description of the behavior of current policy-makers. They have all drunk the “Keynesian Kool-Aid” of a two punch strategy, loose monetary policy and classic fiscal stimulus. Is this going to work? Hardly. The monetary policy of just cutting rates has been discussed by Bernanke himself as being ineffective for solving a credit crunch. It may not hurt, but it does not get credit flowing immediately. The fiscal stimulus of temporary tax relieve has been proven to be ineffective. Economic agents understand the difference between permanent and temporary changes in policy and reaction accordingly. They will not spend temporary tax relief. Policy makers need to think out of the box for solutions. They may include in accounting and regulatory standards.
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