Interview With Edmund Phelps

From a policy perspective, do we need to do more to jumpstart the economy then? Some have suggested a second stimulus package.

We don't have a science of how to deal with crises and we can hope and expect to get wiser on the subject, but it's never going to be like making cookies or mixing a martini. It's always going to be very much a matter of insight, judgment, guesswork, and so forth. But my instincts are to oppose a second package of stimulus. First of all, we've hardly given the first package a chance because it was poorly designed and is just coming online now. By the time the first stimulus package has spent its wad, we can hope the economy will be on the uptick. The second reservation is that we don't really know how effective any given stimulus program is going to be. These stimulus programs are not homogenous: Some are pointed to consumer demand, some are oriented toward capital goods, and we have very little experience with the efficacy of public-works programs to step up demand for capital goods and related goods.

So to make one last point, I would prefer to go along with something that's safer and something we'd like to have around a long time to come which would be a system of low-wage employment subsidies. Some countries like France, Singapore, have instituted programs that pay employers for hanging on to employees, especially low-wage employees, so as to make employment higher than it otherwise would be. Singapore is having pretty good success with that program right now—output looks like it will fall by 9 percent but so far employment has held up. Why don't we do that in the U.S.? Would someone stand up and say what's wrong with it? I wish Larry Summers would say what's wrong with it. He's been sold on the idea it's too complicated, but in Singapore they did it right away in 24 hours, they connected it to the social security system, and it was done.

But to be fair, they have a much more authoritarian government—isn't it simpler to implement something like that once the order comes down from on top?

Things are no doubt a little simpler in Singapore than here, but I don't think the scale matters an awful lot.

You recently said that it may take 15 years to rebuild the wealth lost in the recession.

Yes, I was just making the point about weak consumption demand, that it matters on close analysis. Consumption is going to be weak as long as housing wealth and other wealth is weak, but the good news is that households are going to be rebuilding their wealth. They'll rediscover the habit of saving and, as it happens, that's bad news in the short run but it's good news in the long run because it means wealth will be rebuilt. As wealth is rebuilt, consumption demand will be buoyed up accordingly, and that will contribute to recovery.

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