It is interesting to see Wall Street and so many others still looking to Federal Reserve Chairman Ben Bernanke to fix the economy. They know that he can’t, but they don’t want to believe it. So they hang on his every word, parse his every sentence, and look for hints in his speeches that he have som
e sort of miracle cure for our recession.
He doesn’t have anything of the sort. When it comes to dealing with recessionlike persistent unemployment and a seriously underperforming economy, the Fed is really a one-trick pony. It can lower short-term interest rates and, if that doesn’t work, it can lower short-term interest rates.
The fundamental limitation of monetary policy doesn’t come from politics or even from budgetary constraints. It comes from the nature of economic activity. You can make borrowing more attractive — that is, easier and cheaper — but you can’t make people or businesses borrow when they don’t want or need to.
The limits of monetary policy were masked by the remarkable economic progress in the last half of the 20th century. This, and the follies of our fiscal policy, allowed the ascendancy of the monetarist school, first championed in our country by Milton Friedman and his supporters in what became the Chicago School. The monetary policy approach has become economic orthodoxy, and in the process its limitations were marginalized and erased from the mainstream of consciousness.
Deeply embedded ideas don’t disappear overnight, but the 14 million-plus jobless Americans who have been marginalized in this economy bear witness to the limits of monetary policy.
Fiscal policy, which controls the volume and direction of federal spending, can, to a certain degree, temporarily keep the economic fires from going out completely by substituting public spending for private. However, the financial mess we have made of our federal budget places severe limitations on fiscal policy.
The shadow of debt that covers us doesn’t mean that we cannot use fiscal policy to help turn the economic situation around. But it is unreasonable to think that someone in Washington, D.C., has a miracle cure. Most government wonder-fixes are a waste of time and money as fiscal policy because they do not address three basic economic issues: demand, confidence and stability.
Lowering costs to employers, for example, through payroll tax holidays or jobs tax credits for new hires will not cause businesses to hire people they don’t need. To increase aggregate demand in the economy we have to increase the disposable income of consumers.
Past efforts to do this did not hurt the economy, but they were one-off wonders, that did not take the confidence and stability factors into account. Events had rocked consumer confidence enough so that federal payments arrived at a time when people were deleveraging — lowering the debt they were carrying. Much of the windfall was used to pay off credit card or other debts, increasing the banks’ cash but not boosting demand at all.
Consumer deleveraging has slowed down considerably, so direct payments to individuals in the form of tax cuts or rebates, especially if they appeared more permanent and less like one-time windfalls, would have a greater impact on aggregate demand and private sector jobs.
We shouldn’t look to one-time payments subsidizing state budgets to effect much economic improvement either. Past stimulus money of this type didn’t increase demand. And since they simply postponed the pain of budget cuts they didn’t improve stability or increase confidence either.
Federally funded infrastructure projects often have a very limited effect on jobs and overall demand. Today’s construction work is a lot more capital-intensive and doesn’t require the workforce sizes of years ago. The pre-recession, boom-time pay scale used for these projects also makes them very expensive compared with their economic impact.
Construction jobs are also more specialized, so most public infrastructure projects launched today would provide few opportunities for, say, the roofers, finish carpenters and electricians who have lost their jobs in a still near-moribund housing industry.
If we are serious about turning the economy around we have to realize that we cannot do it by “creating” temporary public sector jobs that will quickly dissolve into unfunded dependencies.
We need to focus our federal government efforts on steadily increasing the funds available to consumers to fuel demand. As just as important, we need to talk about it less.
It is not at all difficult to believe that the more that Congress and the President talk, the more the American people lose confidence in the idea that the federal government can fix the economy. There’s a lesson in that somewhere.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.