Tuesday, August 23, 2011

Pick Your Poison: More Debt or Inflation?

Here is a clash of two titans named Krugman and Rogoff.  Dr. Krugman says that it is cheap for the U.S to borrow right now and that there must be some NPV>0 projects that the federal government can invest in --- so we should increase our debt to stimulate the economy now.   Rogoff appears to want to reduce our debt overhang by igniting some moderate (6%?) inflation.  The Chinese will be grateful for that!

I disagree with these esteemed scholars.  I propose that the Obama Administration adopt four policies.  First, the minimum wage is abolished.  Second,  the earned income tax credit is expanded.  Third, we sell off 3 million passports to the top international bidders immediately.  Fourth, employers can fire workers without cause.      

The combination of these four policies will reduce unemployment, increase home prices, reduce foreclosures and reduce the federal government deficit.  I don't mean to be heartless with respect to policies #1 and #4. Instead, I'm trying to make employers more comfortable with taking risks of hiring workers during uncertain times. If you know you can fire bad workers, then you will be more comfortable ex-ante hiring workers whose productivity you are uncertain about.  The labor market is a "matching market" similar to the marriage market.  Firms must decide whether a worker is a good match for a particular occupation and firm. Firms won't experiment if they anticipate that they are stuck with any worker they actually hire.