In a bold and wide ranging speech, Christine Lagarde, former French Finance Minister, laid out a series of steps governments must take to ensure the world doesn't slide back into recession or even depression. She is by far the most direct and honest speaker at Jackson Hole so far. Her prescription for the United States is simple. Stop fucking around and get to work.
While I disagree with her veiled reference to expansionary austerity ("the nexus of fiscal consolidation and growth"), she is correct that growth is the key to the crisis. Managing the long-term debt falls into the classic Keynesian case of "in the long run, we're all dead." Manage the short and medium term problems, and the long-term problems with take care of themselves.In the United States, policymakers must strike the right balance between reducing public debt and sustaining the recovery—especially by making a serious dent in long-term unemployment. A fair amount has been done to restore financial sector health, but house price declines continue to weaken household balance sheets. With falling house prices still holding down consumption and creating economic uncertainty, there is simply no room for half-measures or delay.
So the United States needs to move on two specific fronts.
First—the nexus of fiscal consolidation and growth. At first blush, these challenges seem contradictory. But they are actually mutually reinforcing. Credible decisions on future consolidation—involving both revenue and expenditure—create space for policies that support growth and jobs today. At the same time, growth is necessary for fiscal credibility—after all, who will believe that commitments to cut spending can survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?
Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.