The economy is experiencing a slowdown from what looked like a stronger recovery (growth declining from 5.6% to 2.7% in the first quarter), but a double-dip recession is unlikely absent some major external shock.

Greece has taken apparently necessary steps toward fiscal responsibility, including raising the retirement age toward 65 and reducing pension generosity, though the changes had not yet fully passed into law.

Job growth is sluggish partly because growth of 2.5-3% is barely above the economy's potential and labor-force growth, so it cannot reduce high unemployment; additionally job growth lags recoveries and the severity of this recession let firms make 'force adjustments' (permanent workforce reductions) that make rehiring slow.

The argument that high productivity growth causes low job growth is mistaken; higher productivity is a benefit that, over any reasonable time period, increases the demand for and ability to hire workers because more productive workers can command higher wages, even though productivity predictably spurts during recoveries.

The Keynesian claim (advanced by Krugman and Pelosi) that extending unemployment insurance is a 'win-win' stimulus omits that extending benefits reduces the incentive to take available jobs; incentive effects remain strong even in recessions and are wrongly downplayed by Keynesians.

Policy-driven incentive effects are demonstrably powerful even in bad times, as shown by cash-for-clunkers and the first-time homebuyer credit, which produced huge spikes in purchases followed by sharp drops once the incentive expired.

The fiscal stimulus and transfer payments have not done much good: the data show transfer payments and rebates did not jump-start consumption as advertised, so the debate is too theoretical when the incoming data already show it is not working.

As of July 2010, only about $415 billion of the ~$787 billion stimulus had been spent, of which $163 billion was tax rebates and only $252 billion was direct spending, with merely ~$14 billion going to Department of Transportation projects (about 5% of direct spending).

The recession and recovery are largely explained by the natural dynamics of private investment (especially inventory investment): firms cut investment sharply out of fear in late 2008, then turned around as early as December 2008-January 2009 when expectations improved, with stimulus measures producing only small blips superimposed on that private-economy trajectory.

Rising federal debt under current policy is on an unsustainable path (CBO projections imply an inconsistency that 'can't stand'), so either policy must be corrected or the inconsistency resolves through disaster scenarios such as hyperinflation or U.S. default; the lack of any articulated correction strategy is itself a major source of uncertainty depressing investment.

Investment is being depressed by multiple sources of regime uncertainty: unprecedented rising debt and expected tax increases, complex financial regulatory reform left to disappointing regulators, health care legislation, and interventions (auto companies, BP escrow fund) that erode the rule of law in ways that could harm the economy gradually over time.

The Fed's large-scale purchases of mortgage-backed securities had a very small empirical impact on the mortgage market (per Hoover/Stanford estimation work) while transforming monetary policy into something resembling fiscal or credit-allocation policy, raising concerns about Fed independence.

The Fed should unwind its expanded balance sheet quickly by gradually selling mortgage-backed securities, which is feasible without disruption because banks hold ample excess reserves to buy longer-term securities; the obstacle is political, not economic, since selling MBS while the economy struggles is hard to defend.

Paying interest on excess reserves (currently 0.25%) is a historically unprecedented policy whose purpose is to let the Fed raise market interest rates without reducing the enormous stock of reserves; because there are too many reserves to control rates via supply, the Fed will most likely tighten by raising the rate it pays on reserves rather than by shrinking the money supply.

An alternative interpretation of Fed policy is that it is either a nasty political payoff to banks or a desperation move to hide banking-sector insolvency: the Fed bought MBS likely above their marked-down value and pays interest on reserves, which subsidizes banks by encouraging them to park money at the Fed.

Lowering the interest rate paid on reserves to zero would probably not cause banks to lend out their excess reserves, because banks are holding those reserves for other reasons (worries about capital ratios and the loans they could make), so the 25-basis-point rate is unlikely to make a large difference to lending.

The Fed leaving mortgage-backed securities on its books risks permanently intertwining monetary and fiscal policy, because if the mortgage market weakens the Fed may resume large purchases, and because waiting too long to exit may cost credibility and make exit impossible; the Fed's loans to the ECB during the Greek rescue showed it moving deeper into unorthodox policy rather than exiting.

The Fed's discretionary ability during the crisis to selectively rescue some firms and sectors but not others (Bear Stearns creditors, Fannie/Freddie, no help then help for AIG, no balance sheet for Lehman) created back-and-forth that spooked markets and was a major cause of the panic.

The Fed's actions were genuinely helpful only during the middle of the panic (supporting the commercial paper market and money market mutual funds in coordination with other central banks); the pre-panic discretionary interventions likely caused the panic and the post-panic MBS purchases create future problems, so on balance Fed policy has been harmful.

What most stopped the 2008 panic was the clarification of how TARP would be used: the panic intensified when TARP was rolled out to buy toxic assets in a way nobody understood, and stopped quickly once policymakers changed course about three weeks later and provided clarity.

The financial crisis was caused or prolonged in part by the Fer deviating from the Taylor rule: Greenspan held the federal funds rate too low for too long in roughly 2003-2005 and then raised it too fast, departing markedly from the rule-based policy that worked well through the 1980s and 1990s.

The massive growth in narrow money (the monetary base/bank reserves) has not yet produced inflation because the relationship between narrow money and the broader aggregates (M1, M2) changed, so broad money has not exploded; this is consistent with monetary theory, and a recovering-slowly Phillips-curve dynamic further dampens inflation.

The large stock of narrow money will eventually translate into broad money as banks start lending, so unless the Fed can bring narrow money down (which skeptics doubt is politically feasible), there will for sure be a big inflation; bond markets appear to be discounting that outcome by expecting some other resolution.

Poland was the only EU country to avoid recession during the Great Recession because it did not overreact: it kept policies steady with no big stimulus, maintained steady monetary policy, and had pre-crisis reforms keeping debt low, limiting foreign-currency borrowing, and maintaining good inflation-targeting policy—similar to other resilient emerging markets like Brazil and India.

Many countries pressured by the G20 to adopt stimulus, including Poland, effectively relabeled policies they were already pursuing (such as already-scheduled tax changes) as 'stimulus' rather than genuinely overdoing fiscal expansion, which makes cross-country stimulus comparisons very hard and creates rich natural experiments for research.

The lesson from Greece is that these crises are largely caused or prolonged by government actions (deficits, not the private sector), and the U.S. faces a strong warning because its projected debt-to-GDP path under current policy rises more than Greece's; the U.S. must lay out a credible plan now, even if it has more time to implement adjustments.

Low U.S. Treasury yields despite profligate fiscal behavior reflect investor belief that the U.S. 'will get its act together' as it has before, expectations of a slow-growth low-inflation period, and a possible 'this time is different' psychological bias; the underlying inconsistency is not resolved in any obvious way, creating substantial uncertainty.

The market interest rate is being artificially held down (not pushed up) by the massive amount of excess bank reserves, since the rate is determined by supply and demand for money/bank reserves and the enormous excess supply drove the rate to near zero in fall 2008.

We do not have strong empirical evidence linking people's expectations of future deficits to current spending behavior, because expectations are hard to measure; the reliable evidence is the direct effect that higher taxes discourage whatever is taxed, and common sense that future higher taxes are already on the books.

Just as today's Keynesians claim the New Deal failed because Roosevelt didn't spend enough (raising taxes, recovery stalling in 1938), we will likely hear the same story in 20-25 years that the 2009 stimulus failed only because it wasn't big enough.

The federal funds rate has been pinned between zero and 0.25% since December 2008, and long-term rates have recently fallen rather than risen due to a flight to safety stemming from European concerns.