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.
It is not often that this sort of partisan dispute over something as arcane as a ceiling on the national debt can attract the attention of both consumers and the business community. But this is such a time. The failure to solve what voters think is a threat not only to themselves but to their children’s prosperity and way of life has some two-out-of-three telling pollsters that America is on “the wrong road,” an attitude that might sink the president if it persists into next year, and if the Republicans can select a candidate deemed capable of taking the country down “the right road,” “right” as in “correct” and, to some, as in a shift to the political right.
Contributing to the majority view that the country is headed in the wrong direction are: the 9.2 percent unemployment rate; the increasing number of workers who have been out of a job for an extended period, many having given up the job hunt; the continued fall in house prices and rise in foreclosures; the bleak future prospects of older workers who have been laid off, and younger people trying to get their first job; and extended political bickering that contributes so much to uncertainty.
Businessmen are no less nervous than consumers. The administration has made it clear that in any dispute with the trade unions, such as those now involving Boeing and Delta Airlines, businesses can expect the administration to put its weight behind the unions. Health Secretary Kathleen Sebelius has announced that after September 22 there will be no more waivers from the application of Obamacare, meaning a huge rise in health care costs for many firms, including small businesses that are counted on to hire us out of this recession. And the White House will not push for congressional approval of new trade agreements unless Congress votes billions for workers who might claim that they were thrown out of work by increased imports, the president’s way of claiming to favor free trade while at the same time assuring the trade unions that he really doesn’t.
Then there is Greece, like the deficit ceiling, not a subject that ordinarily engages Americans’ attention. Now it does, and not only because of fear that some of our financial institutions, especially money market funds that provide foreign banks with liquidity, might be exposed to a Greek default. These institutions need not be too big to fail, only too interconnected not to. Americans once confident of the ability of our economy to generate untold wealth now find comparisons with Greece not only frightening but demeaning.
For the next 17 months—until the November 2012 elections—the economy is in the hands of politicians. Businessmen will continue to hoard cash, using such funds as they want to invest to build facilities overseas. Consumers with jobs, and who are current on their mortgage payments, will continue to keep their credit cards holstered for fear they might be next on the unemployment or foreclosure lists.
But as bad as things seem, they are not bad enough to support the notion that a double dip is definitely in our future. After all, it is not beyond the realm of possibility that a deal on the debt ceiling will dispel the notion that the political process is broken and provide a bit of certainty as to future tax rates, encouraging consumers and businesses to loosen their purse strings.
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