recession demands that capital and labor be reallocated. but, the reallocation of these resources to new sectors and companies has been painfully slow and unnecessarily interrupted. we are now feeling the ill effects. if policymakers fail to give the supply side of the economy more considered attention, we will find the new normalists to be right. if untreated, the cyclical becomes structural. persistent weakness in the labor markets, in effect, permanently disqualifies more workers from a place in the labor force. the natural rate of unemployment moves higher and potential gdp falls. and substantial harm is done to our well - being, threatening to demoralize our populace who knows better. but, this need not be so. fiscal authorities should resist the temptation to increase government expenditures continually to compensate for shortfalls of private consumption and investment. a strict economic diet of fiscal austerity has greater appeal, a kind of penance owed for the excesses of the past. but root - canal economics does not constitute, in my view, optimal economic policy. the united states would be better off with a third way : pro - growth economic policy. after all, it is stronger growth that the u. s. and world economies most urgently need. the fiscal authorities should begin this exercise by asking two questions : how big a government is desired? and how is it to be funded? we can no longer afford the answers to each of these questions to be at odds. but, the conduct of fiscal policy should not stop there. the government can fund its endeavors in ways that are growth - friendly or growth - stifling. we can no longer afford to be indifferent to the choice. the adoption of pro - growth economic policies would strengthen incentives to invest in capital and labor over the horizon. it would place the country ’ s economic potential at the center of the policy nexus. pro - growth policies would give us the best opportunity to bring unemployment rates down dramatically. of course, it demands a highly mobile, educated workforce, and much work needs to be done there. but the good news is that the united states still has the most dynamic, resilient labor force in the world, and the deepest, most liquid capital markets. it is strong growth that can do more to increase government revenues. it is strong growth that can most effectively defease outsized liabilities. and it is strong growth that can pave the way for robust job creation and higher living standards. pro

sustained and passed along into final prices, the fed ’ s price stability objective might no longer be a compelling policy rationale. in such a case – even with the unemployment rate still high – the fomc would have cause to consider the path of policy. this is truer still if inflation expectations increase materially. and if the fed ’ s holdings work predominantly through the so - called portfolio balance channel, the cessation of purchases should not reverse any benefits attained. the fed ’ s increased presence in the market for long - term treasury securities also poses nontrivial risks. the treasury market is special. it plays a unique role in the global financial system. it is a corollary to the dollar ’ s role as the world ’ s reserve currency. the prices assigned to treasury securities – the risk - free rate – are the foundation from which the price of virtually every asset in the world is calculated. as the fed ’ s balance sheet expands, it becomes more of a price maker than a price taker in the treasury market. and if market participants come to doubt these prices – or their reliance on these prices proves fleeting – risk premiums across asset classes and geographies could move unexpectedly. the shock that hit the financial markets in 2008 upon the imminent failures of fannie mae and freddie mac gives some indication of the harm that can be done when assets perceived to be relatively riskless turn out not to be. in the united states, the fed ’ s expanded participation in the long - term treasury market also runs the more subtle risk of obfuscating price signals about total u. s. indebtedness. longterm economic growth necessitates putting the u. s. fiscal trajectory on a sounder footing. the fiscal authorities need as clear an early warning system as possible, not a handy excuse to delay. and overseas – as a consequence of more - expansive u. s. monetary policy and distortions in the international monetary system – we see an increasing tendency by policymakers to intervene in currency markets, administer unilateral measures, institute ad hoc capital controls, and resort to protectionist policies. extraordinary measures tend to beget extraordinary countermeasures. second - order effects can have first - order consequences. heightened tensions in currency and capital markets could result in a more protracted and difficult global recovery. these, too, are developments that the fomc must monitor carefully. responsible monetary policy in the current environment requires attention not only to near