Table of Contents

World Finance and Economic Stability

World Finance and Economic Stability

Selected Essays of James Tobin

James Tobin

Nobel Prize winner James Tobin has made outstanding contributions to modern macroeconomics. In this final collection of his work he examines the economic policies of the United States and its relations with other major economies after 1990. In James Tobin’s view, the welfare of populations depends uniquely on these policies and it is important to be aware of their impact.

Introduction

James Tobin

Subjects: economics and finance, financial economics and regulation

Extract

The US economy suffered two quite distinct shocks in year 2001. First was the business cycle recession, raising unemployment from 4 to 6 per cent and depressing production, prices, incomes and asset values – familiar events which Americans had been spared for most of the previous decade. Recovery is coming, it is generally agreed, with revival of demand for goods and services by consumers, businesses, governments and foreign customers. Supply is no problem. The nation has the workers, materials, productive capacity and technology to respond to much higher demands. How to stimulate spending? By still lower interest rates? The Federal Reserve cut its key rate 11 times last year, from 6 per cent to 175 per cent. Or should the Fed husband those remaining 175 basis points of the Federal Funds rate for possible future needs? It seems weak strategy, deliberately keeping monetary policy too tight. To avoid a liquidity trap, the Fed should try to lower longer-term rates and loosen bank credit. By cutting taxes again? A large cut? The earlier one was estimated to add up to $1.6 trillion in this decade and permanently to deprive the federal government of two of the 16 percentage points of national incomes it now collects. Later in 2001, refunds of $300 per federal income taxpayer were distributed. Debate continues on further federal fiscal stimulus to demand. The second blow was the terror of 11 September, wholly beyond expectation and experience; it is still potentially terribly dangerous and costly. The worldwide war...