Loose Money and Deficit Spending Have Not Cured the Economy
12:00 AM, Jun 25, 2011 • By IRWIN M. STELZER
President Barack Obama spent over a trillion dollars on projects he claimed were “shovel-ready” and would prevent the unemployment rate from reaching 8 percent. Federal Reserve Board chairman Ben Bernanke obligingly printed $600 billion with which to buy the president’s IOUs, predicting that running the printing presses would get the economy growing at an annual rate of something like 3.5 percent, and that the low interest rates he was setting would revive the moribund housing market.
The result of these policy moves is
♦ a deficit hovering around 10 percent of GDP (about in line with Greece),
♦ cumulative U.S. debt predicted by the Congressional Budget Office to hit 100 percent of GDP in ten years, absent major changes in policy,
♦ a Federal Reserve balance sheet bloated to almost $3 trillion and packed with Treasury paper and mortgage-backed securities—triple the level before the financial crisis hit,
♦ an unemployment rate of 9.1 percent,
♦ an annual growth rate of an anemic 1.9 percent.
Not much to show for all that spending and printing. Bernanke admits, “We don’t have a precise read on why this slower pace of growth is persisting,” with the word “precise” a substitute for an admission that like most economists he hasn’t a clue as to why the U.S. and world economies have slowed down. The Fed has lowered its forecast of economic growth for this year from the 3.3 percent rate it predicted only two months ago to 2.9 percent, and from above 4 percent in 2012 to 3.7 percent. Economists at Citigroup Global Economics think the Fed is too cheery, and expect growth in 2011 to come in at 2.5 percent and to increase in 2012 to only 2.8 percent, well below the Fed’s 3.7 percent.
The Lindsey Group adds that the Fed’s guess that the unemployment rate will fall to between 7.8 and 8.2 percent in the final months of 2012 is even more likely to prove excessively optimistic. President Obama is hoping the Fed has it right, so that he can go to the polls with the unemployment falling, even if not to levels most people would consider acceptable.
Despite the slowdown, Bernanke is sticking to his promise to end the $600 billion bond purchase program, better known as QE2, at the end of this month, with many of his colleagues in the good riddance camp. Anyone hoping that the chairman will use this summer’s meeting of central bankers in Jackson Hole, Wyoming, to announce the launch QE3 is doomed to be disappointed. But Bernanke has promised to continue other policies that will keep interest rates low, and for a long while, in the continuing hope of stimulating the economy and, most especially, the housing sector, which shows little sign of life.
Meanwhile, the president is not quite as willing as the Fed to modify his policies. Bernanke might be ending his QE2 program, but the president remains wedded to the proposition that deficit spending will get the economy moving again. In his television broadcast announcing troop reductions in Afghanistan, Obama said he would take the savings—when prior wars ended these were called “peace dividends”—and spend them on infrastructure and on green energy projects. No mention of deficit reduction.
Which means that the president is viscerally opposed to the spending cuts that the Republicans are demanding if they are to agree to a deal to raise the debt ceiling and avoid what Treasury Secretary Tim Geithner says will be a default. Republicans, in turn, are opposed to the tax increases the Democrats insist be part of any deal. The Republicans have the better of argument: the rapidly accumulating government debt is due to the huge increases in spending during the Obama years. But as a political matter, their decision late last week to walk out of the negotiations because the Democrats won’t take “revenue enhancements” off the table can be nothing more than a bluff. They must know they will have to concede some tax increases if the Democrats are to go along with their spending cuts.