John, you say we've gone from acute to chronic crisis. What do you mean by that?
We threw a lot of stimulus at the acute crisis in 2008, 2009. We got a nice bounce, but the bounce seems to be waning.
Should we have just done more stimulus?
I think we could have designed it a lot better. Spending $800 billion on what amounts to congressional pork is probably not the best way to go. What I and others pushed for was a one-year payroll-tax holiday for both employers and employees. Remember, the payroll tax is a tax on hiring labor. So if you give employers a year off, they're basically going to be more inclined to add workers or less inclined to lay workers off because the cost of keeping people on the payroll has been reduced. It seems like a great idea to me.
Consumers are so frightened, they are paying down debt and not spending. That could lead to deflation. Why should we fear deflation?
Deflation is a condition where prices are falling. The big danger is that it reinforces people not to spend, and at a time when we have a lot of excess capacity, it can become dynamically unstable. That is, I spend less, prices fall faster, and I spend even less. So in Japan you have deflation running about 2 percent. The problem with deflation is that once it takes hold, it tends to accelerate, and it's a very dangerous contractionary force.