Technocrats to the Rescue
Nearly four years after the start of the financial crisis, unemployment remains high and business investment is slowing. The housing sector appears to finally be sputtering back to life, but America is still waiting for a sustained recovery.
So what are our leaders doing about it? Largely nothing.
In a country with all the economic tools to give a serious pick-me-up to its slow economy, most of the key players are sitting on their hands or actively making things worse. Congress has blocked the President’s jobs plan and is actually cutting spending before the economy has recovered.
And so America, finding its democratic institutions incapable of responding to economic sluggishness, turns to its resident technocrats at the Federal Reserve. On September 13, the Fed announced a new round of monetary stimulus in which it would buy billions of dollars in long-term assets and mortgage-backed securities to drive down long-term interest rates, including mortgages.
Past rounds of stimulus have had specific end-points, limiting their impact. In a significant shift, the Fed said this time its commitment to asset purchases would be open-ended. The Fed will continue the stimulus not just until the labor market improves “substantially,” but “for a considerable time after the economic recovery strengthens.” In effect, the Fed is making clear that it isn’t joking around this time.
Which is nice to hear, because looking at Capitol Hill, you get the impression that our leaders think they’re playing a game in which reelection is the only goal and actually helping the economy is something nice to do if you can get around to it.
Current fiscal policy is wildly inappropriate, combining short-term tightening during a weak economy with inaction on our serious long-term federal shortfall. Congress hasn’t passed a significant stimulus bill since 2009. In fact, Congress itself has managed to create one of the gravest threats to the recovery with the fiscal cliff, which we continue to blithely sail towards. Meanwhile, leaders in both parties position themselves for political advantage in the inevitable national crisis at the end of this year instead of working to defuse the time bomb.
Republicans serve an important role as long-term budget hawks, but in their rightward lurch they’ve forgotten tried and true ways to stimulate in the short term. Cutting spending during a sluggish recovery will hurt your economy, as Britain can attest. Long-term debt matters, but it’s okay to temporarily expand borrowing to stimulate yourself out of a recession (including with tax cuts!) when your borrowing rates are effectively negative and inflation is low.
President Obama essentially got as much fiscal stimulus through Congress as he could. His economic team felt the stimulus needed to be roughly twice as large to truly fill the “output gap” in the economy, but the moderate Senate Democrats whose votes were needed to overcome a GOP filibuster demanded it be no larger than $800 billion.
The bill likely should have included more aggressive action to restart the housing market, but there is no doubt that the stimulus helped the economy, Mitt Romney’s claims notwithstanding. The Congressional Budget Office estimates it increased employment in the second quarter of 2010 by 1.4 to 3.3 million. Private economic forecasters and a consensus of academic studies arrive at similar conclusions.
Yet last fall, when Obama proposed the American Jobs Act—basically, a second helping of stimulus that would create 250,000 to 2 million jobs, depending on whom you ask—Senate Republicans filibustered it.
Clearly, the two parties have very different philosophies on how to spur economic growth. Democrats favor spending while Republicans favor tax cuts and deregulation. Luckily, those two policies are not incompatible; we could pass another large stimulus package tomorrow split evenly between new spending and tax cuts. Unfortunately, polarization has reached the point where one party refuses such compromises as a rule.
The result: Millions of Americans who could be employed search fruitlessly for work, losing skills and slipping into the ranks of the long-term unemployed. This, because politicians have lost the willingness to compromise that has kept our diverse nation together since the beginning.
And that leaves the Fed, insulated as it is from the perverse political pressures of today’s Washington, to take action. Monetary stimulus, however, is not a panacea and is reaching its limits, as Ben Bernanke has warned. Congress needs to, but won’t, do its part with smart fiscal policy, meaning both short-term stimulus and long-term deficit reduction.
I’m as much a fan of democracy as the next American, but our political system today is of the parties, by the parties, and for the parties. Somewhere along the way, the public good got lost in the shuffle. Maybe that will change someday, but until then the Fed will remain a lonely curiosity of Washington: A proactive institution that bases its policy on sound evidence rather than partisan ideology and is beholden to no one but the American people.
Wyatt N. Troia ’14, a Crimson editorial editor, is an economics concentrator in Winthrop House.