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Monetary Policy, Deficit Reduction, and the Ryan Plan

12:00 AM, Apr 9, 2011 • By IRWIN M. STELZER
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Whatever coordination existed between policymakers immediately after the world’s economic crisis is no more.

Wall Street

Start the policy tour with China. The regime’s leaders, worried about accelerating price increases that have taken the inflation rate to about 5 percent, have raised interest rates four times in five months. The one-year lending rate now stands at 6.31 percent, which the regime hopes will prevent the unrest caused by rising food prices without triggering the unrest that would follow if the economy slowed too much, creating a large reserve army of unemployed labor.

On to the eurozone. Jean-Claude Trichet, head of the European Central Bank, fears that a rise in prices of Chinese imports will further increase inflation rates in the eurozone, already above his target of less than 2 percent, and has begun raising rates. Groans from Lisbon, Dublin, and Athens matter less than cheers from inflation-phobic Germany: it is unreasonable to expect everyone to squeeze comfortably into the one-size-fits-all interest rate of the 17-nation eurozone.

Then to Latin American and the international agencies, where more inflation hawks roost. Several Latin American central bankers are raising interest rates, while economists at the International Monetary Fund have done volte face, and are now urging developing countries to impose capital controls to prevent the inflow of hot money that has historically triggered inflation.

The Anglo-Saxons see things differently. Both Mervyn King, governor of the Bank of England, and Ben Bernanke, chairman of the Federal Reserve Board, believe the price spurt in the commodities market will play itself out in the next several months, and that inflation will again subside. Besides, an emerging recession in Britain, King figures, and tepid job growth in America, Bernanke figures, demand low interest rates and the continued printing of money, with the result that Captains King and Bernanke continue to sail forward on their separate sister ships, QEUK and QE2USA, despite complaints from some crew members that they are steering their economies into rough inflationary waters. The minutes of the March 15 meeting of the Fed’s monetary policy committee note, “A few participants indicated that economic conditions might warrant a move towards less- accommodative monetary policy this year.” And Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, thinks interest rates should go up 75 basis points (¾ of 1 percent) by year-end, a view shared by several private sector economists. Not quite a mutiny, but neither is it a vote of confidence in the captain.

U.S. and UK monetary policies might be similar, but fiscal policies definitely are not. George Osborne, Britain’s chancellor of the Exchequer, has decided that taming the deficit over the next four years is essential to keeping the bond vigilantes, who have wreaked havoc with the economies of Greece, Ireland and Portugal, at bay. So far, so good: Britain retains its triple-A rating, and the slower or nil growth resulting from lower spending and higher taxes has not produced politically unmanageable outcries. At least, not yet.

In America we have checks and balances, rather than parliamentary dictatorship. The president proposes, Congress disposes. The result is a war between a Republican-controlled House of Representatives intent on rolling back taxes, spending, and the size of government, and a Democratic-controlled Senate and White House intent on maintaining or even increasing spending, and raising taxes.

It is this difference, plus disagreement over just what is to be cut, rather than the tiny sums involved -- perhaps ¾ of 1 percent of the $3.8 trillion the government is projected to spend in the current fiscal year -- that caused the impasse that nearly resulted in a shutdown of non-essential government agencies on Friday. This battle was made inevitable when the Democrats, then in control of both chambers of Congress, refused to approve their president’s proposed budget for the fiscal year beginning September 1, 2010 because too many Democrats feared his plan for continued high spending and unsustainable deficits would spell disaster at the polls. In the end, even though it failed to win congressional approval, many of the Democrats who thought they could hide behind a refusal to vote for the Obama budget were returned to the private sector, replaced by Republicans who pledged to cut spending and the size of government.

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