US Elections

It's not just the Fed

By Jonathan Bradley in Sydney, Australia

21 June 2012

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There's nothing good about the Fed's decision today to essentially sit on its hands instead of taking aggressive action to boost economic growth and reduce unemployment. If — as Fed senior officials predict — unemployment won't drop below 8 per cent and inflation won't rise about 1.7 per cent, monetary policy is clearly far too tight. It's absurd to accept such a slump as a new normal. And that's why there's sense to calls like those from Matt Yglesias for liberals to start paying attention to America's central bank:

On monetary policy, by contrast, the difference between the Fed’s current posture and a change of course would be dramatic. Bernanke assured members of Congress that he stands at the ready to bolster the American economy if shocks from Europe or elsewhere slow us down. What the country needs, however, is to speed up, no matter what happens in Europe. A clear statement that the Federal Reserve thinks higher prices for rental housing and primary commodities would be a small price to pay for an end to mass unemployment is a necessary condition for avoiding years of sluggish growth. But the central bank is extremely unlikely to change direction when nobody’s pushing them to. Getting monetary policy right lacks the interest group appeal of the American Jobs Act, the poetic grandeur of a massive public works program, or the basic emotional appeal of complaining about out-of-control bankers. There’s nothing wrong with talking about any of those things, but none of them change the fact that rapid recovery is all-but-impossible without cooperation from the central bank.

But Fed chief Ben Bernanke is also right when he says, “Monetary policy is not a panacea ... Monetary policy by itself is not going to solve our economic problems. We welcome help and support from any other part of the government, from other economic policy makers. Collaboration would be great.”

That's code for "Congress needs to stop working against the Fed and enact some more stimulus." 

Monetary policy is great, but at a certain point, it become, like John Maynard Keynes said, like pushing on a piece of string. Interest rates are at less than zero in real terms, and that leaves the Fed with little room to act. The only thing stopping Congress from helping the economy by passing bills that boost government spending and hence stoke demand is the refusal of individual Congresspeople to vote for them.

Discussions of the impossibility of future stimulus treat this instransigence as a fixed quality. Yglesias, for instance, says fiscal stimulus is "politically impossible" (and "substantively inadequate," which is a different argument.) But the Republicans in Congress are not a fact of nature — an awkward economic reality that must be negotiated around. Well, they are if you're the president or a member of the Democratic Party. But people commenting on the US economy, such as Yglesias or myself, aren't political advisors, we're analysts. And the truth is that the most effective plan to get the economy going again is being ignored because the Republican Party refuses to consider it. Not because the Fed is making bad decisions or because of some fundamental problem with the American economy. It's because individual representatives in Washington D.C., who are perfectly capable of changing their minds, are making decisions that work against the American interest.

Saying that means I don't get to shroud myself in the sheen of partisan disinterest that comes with imploring the Fed to make better decisions. But my problem isn't with the GOP. It's with politicians who could be, for instance, giving money to states and city councils to hire teachers and police and other such jobs that have been cut by belt-tightening local governments, and are refusing to do so. It just happens to be that those politicians appear on C-SPAN with "(R)" after their name.

Tags: Fiscal Policy, Monetary Policy

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