Does The Fed Have Anything Else in its Bag of Tricks?
The economy is much more sluggish than the members of the Federal Reserve Board and experts, in general, expected.
Economists are ratcheting back GDP growth expectations. What started out as optimistic has turned to rational. And, now, the projections for GDP growth are tenuous.
The Fed is suggesting growth will be in the 3 to 3.5 percent range.
What’s troubling is that the Fed and every other governmental budget officer has spent their wad on propping up the economy. Is there anything else they can do?
The answer is, “yes.”
The Fed can do a number of things that could shore up economic growth. In recent testimony, Fed chief Ben Bernanke said the board is ready to act.
“If financial conditions become more stressed — as would happen presumably if the economy began to weaken, I think those steps would be more effective relatively speaking.”
What can they do:
Taking Stock. There are hints they may invest in securities.
Keep interest rates low. The Fed is committed to keeping interest rates at the 0 percent rate.
This may help. It may actually hurt. More debt could mean more inflation and a weaker recovery.
What we really need is to stir the innovative power of the free market. We need to make our technological, business, and artistic leaders more confident in the future.
These efforts are lacking. In fact, these groups have been made a target by policymakers.
In order to stimulate more innovation, we need to increase the potential for rewards and lower the risks. Cutting, or eliminating investment-oriented taxes, like taxes on dividends and capital gains, would be a good start. Tax breaks for creating or investing in new businesses and technology is another good idea.
But those ideas look like long shots, when it’s so easy to fire up the fed’s magical money presses…
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
I think the Fed and the Government in general are in a tough spot for improving the economy. The near zero inflation rate did nothing for Japan, whose economy laguished for decades. Most of the incentives were quickly gathered up by wealthy entities, instead of recirculating through the economy. Every day, there are reports about companies like Harley Davidson making record profits on shrinking sales, because they have cut payrolls to the bone. And, they don’t plan on rehiring any time soon. They are just going to keep banking the profits.
Long-term, what the government needs to do is:
1) Cut government spending to reduce the deficit and taxes
2) Lower payroll taxes and regulations to encourage hiring
3) Close corporate tax loopholes to encourage reinvestment
Unfortunately, these things are difficult to do and they would have a devastating effect on the economy in the short term. For example, could you imagine the unemployment rate if the government cut all of the unnecessary programs and employees? Social Security and MediCare are insolvent, which means payroll taxes are going up dramatically. And, this won’t help to bring any new jobs. Finally, the government’s high deficits and the taxes to repay them are going to suck the life out of the private sector for decades.
I see painful medicine ahead and the longer we put it off, the sicker we will become. But, I don’t see anyone with the guts to pull the trigger. We need a Ronald Reagan, but we have a Jimmy Carter.
Amen.