President Obama, his economics team, and the Chairman of the Federal Reserve continue to display a curiously detached view of the economy. Just the other day, the president indicated that “it took nearly a decade to dig the hole that we’re in” as if that provided an excuse for the lassitude he continues to display in regard to the problem of unemployment. By the same token, Ben Bernanke essentially admitted that monetary policy alone cannot keep economic growth moving, but seems curiously resistant to additional fiscal policy measures on the grounds that “fiscal impetus and the inventory cycle can drive recovery only temporarily.” He is wrong about that.
Essentially, our policy makers are making the case that the US government is not able to fill a greater proportion of aggregate demand with public spending on the grounds of “national solvency” and the corresponding need to “retain the credibility of the bond market”, as if the daily vicissitudes of the bond gods constitutes a rational basis for employment policy. Neither the administration, nor the Fed provide any substance to the now recurrent refrain that the government is “running out of money”. The mainstream debate chooses to focus on the “financial” aspects of these projected changes arguing that they will imply rising budget deficits which they define as being unsustainable. The “budget costs or outlays” are financial not real constructs. The relevant issue relates to real resource availability in the future or inflation, NOT national “insolvency”.
The hole to which the president referred is just the fall in private spending brought about by an increased desire to save. The hole means that productive capacity will become unused and the jobs that could have been applied to that capacity are lost. So in March 2007, when the unemployment rate was 4.4 per cent, the total US capacity utilization rate was 80.5 per cent. At present, in August 2010, capacity utilization in the US is around 70% and unemployment on its broadest measure is around 15%. This has all been driven by decline in private spending, not “excessive” government spending, which allegedly risks “crowding out” private spending, thereby making it impossible for the US government to deal with the recession (because it has run out of money) and hindering the capacity of the private sector to recover because of too much government interference in the “free market”.
The US government can always “fill that hole” if it has the political will. As a sovereign issuer of its own currency, the government has all the capacity it needs. But this US government does not have that political will despite its rhetoric. The evidence for that is the persistent deficit phobia expressed by the president and his advisors, along with an undue reliance on monetary policy.
The US economy is now slowing and shedding net jobs again. This was to be expected given the impact of the fiscal stimulus is now waning. Consumer spending is very weak and unresponsive to the easing of monetary policy. Even the Federal Reserve Chairman, Ben Bernanke, implicitly recognizes that there are limits to the impact of monetary policy. In his recent speech at the Jackson Hole economic symposium in late August, Bernanke conceded: “Central bankers alone cannot solve the world’s economic problems.”
The Fed chairman is right: While the Federal Reserve can undertake actions which will hold down interest rates which may be beneficial at the margin, the US economy desperately needs some direct spending injected. That can only come at present from fiscal policy, which is why it is odd that Bernanke (along with most of our policy makers in DC) continue to resist more active fiscal policy responses to the ongoing problem of unemployment. In a time of over-indebted households and weak aggregate demand, workers are simply losing their jobs and remaining unemployed, so they are not in a position to spend as much. While unemployed, they draw government benefits, and thus maintain some baseline level of consumption, avoiding 1930s style debt deflation. At the same time, this large pool of unemployed workers mean businesses can keep wages down, sell into what government supported aggregate demand is there, and pocket the rest as profits.
How long will it take for our political leaders to realize that adding monetary base to the system (adding bank reserves) does very little to stimulate the economy? The truly germane point which seems to be missed in regard to the question of whether the economy experiences a so-called “double dip” is that even if we don't get a return to recession in the definitional sense of two quarters of negative growth, it will still feel like that to millions of Americans due to the lack of job growth. This can only be achieved today via sustained fiscal policy action, whether that be via tax cuts or direct government spending. Deficit reduction per se should not be an objective of policy today, because as growth re-emerges, unemployment will come down, and the deficits we presently face will necessarily shrink.
What, then, should the government be doing today, given Mr. Bernanke’s concession of the limits of monetary policy? To start, the government could initiate Job Guarantee (JG) program, on a buffer stock principle whereby the public sector offers a fixed wage job for up to 35 hours per week to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers which expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks. The program would allow for the elimination of many existing government welfare payments for anyone not specifically targeted for exemption, and would command greater political legitimacy, as society places a high value on work as the means through which individuals earn a livelihood. Minimum wage legislation would no longer be needed as it would be established via this Job Guarantee program. Labor would welcome the safety net of a guaranteed job, and business would recognize the benefit of a pool of “shovel ready” labor it could draw from at some spread to the government wage paid to JG employees. Additionally, the guaranteed public service job would be a counter-cyclical influence, automatically increasing government employment and spending as jobs were lost in the private sector, and decreasing government jobs and spending as the private sector expanded. It would therefore remain a permanent feature of our economy, in effect acting as a buffer stock to put a floor under unemployment, whilst maintaining price stability whereby government offers a fixed wage which does not “outbid” the private sector, but simply creates a stabilizing floor and thereby prevents deflation.
But more is required in the short term. Announce a payroll tax holiday, and let households actually repair their balance sheets. Additionally, we need to assist the states via revenue sharing on a per capita basis with no strings attached. This will help the states to fund operations, keep workers employed, provide necessary services and fund infrastructure projects. This “radical” proposal was introduced by that noted progressive, Richard Nixon, in 1972, so the Obama Administration would not be breaking new ground here.
It is clear that Bernanke and Co. think that monetary policy is the main game in town. Unfortunately, this misguided faith in the Fed just ensures the perpetuation of bad policies which help our financial elites, but do little for Main Street.Much of Washington remains fixated on the “unsustainable” budget deficits, making it improbable that another stimulus package will be forthcoming. In large part, we believe, this is because the public is furious about the funding of the Wall Street rescue package. In that sense, the financial bail-out has “crowded out” more sensible spending policies. But in the face of today’s uncertainty, the private sector is understandably loath to spend, which is creating a huge drag on growth. Fearing for their jobs, individuals are paying down debt, not spending. Although we need to reduce private debt, when a few individuals increase their saving, we can safely ignore any macro effects because they are so small that they have only an infinitely small impact on the economy as a whole. But if everyone tries to increase saving, we cannot ignore the effects of lower spending on the economy as a whole. That is the point that has to be driven home. Only the government can step into the breach in this circumstance. When critics begin to talk about “wasteful” government spending, it is worth reminding them that there is no greater waste than persistent unemployment. It dwarfs all other inefficiencies.