Washington & Wall Street: Austerity vs. Financial Repression
The liberal segments of Congress and the Big Media are pounding away on the idea that “austerity” due to budget cuts is somehow behind the slow performance of the US economy. Never mind that there is little evidence that the massive public spending by the Obama Administration after 2007 had little or no impact on either jobs or consumer spending.
Kevin Drum, writing in Mother Jones, name-calls his way through a diatribe focused on how conservative “zealots” are relentlessly cutting spending. In fact, spending is just growing more slowly:
“And they're still at it. As I write in the story, conservatives remain obsessed with slashing spending despite the fact that (a) this is unprecedented in recent history and (b) the deficit has already been slashed repeatedly over the past three years… After every other recent recession, government spending has continued rising steadily throughout the recovery, providing a backstop that prevented the economy from sliding backward.”
Drum is correct that in past recessions, the government did increase spending to allegedly offset a decrease in consumer spending, but he fails to note that the US government never moved the budget back into surplus once the recession ended officially. The key tenant of Keynesian economics was that the nation needed to repay the debt in good times. But today you never hear anyone on the left talk about debt repayment. It’s like the joke about the Fed ever selling any of its massive bond portfolio.
Drum blames the publication of the research of Reinhart and Rogoff for the conservative obsession with budget cutting, something that New York Times scribe Paul Krugman also regularly attacks. He wrote May 26, 2013 in the Times:
“There is, however, an enormous difference between the statement “countries with debt over 90 percent of GDP tend to have slower growth than countries with debt below 90 percent of GDP” and the statement “growth drops off sharply when debt exceeds 90 percent of GDP”. The former statement is true; the latter isn’t. Yet R&R have repeatedly blurred that distinction, and have continued to do so in recent writings.”
When it comes to “austerity,” we need to say that the left’s obsession with the sloppy research of Reinhart and Rogoff is really beside the point. It is very clear from the economic performance of the US since the 1980s that the growth of government and the welfare state has coincided with decelerating overall performance looking at jobs, consumer income, etc. Since about half of income, for example, comes from transfer payments, and since the government deliberately understates inflation for the purposes of cost-of-living increases, is it really a surprise that the US economy is growing slowly?
Add in the fact that the Fed is depriving millions of Americans with a decent return on their savings and, again, there is little surprise that the US economy is growing slowly. The subsidy that the Fed’s low interest rate regime provides to debtors at the expense of savers is worth hundreds of billions of dollars annually. If Krugman and other members of the left wing economic establishment really care about boosting consumption, then we need to restore some of Grandma’s purchasing power.
Taking away the income of all manner of investors must certainly have a negative impact on the economy. Yet for reasons that are hard to comprehend, most liberals like Krugman or Drum support the Fed’s zero rate policy and the enormous wealth transfer from retirees and other savers to the most affluent that it represents. The current policies of the Federal Open Market Committee are entirely regressive, to use the language of the left, yet are the consensus result of one of the most left wing Fed boards ever seated.
What we need to do in order to grow jobs in America is two things. First, we need to continue fiscal restraint at the federal level and even look for ways to cut taxes to spur private sector growth. If you as a liberal want Americans to spend more, then tax them less. Indeed, the tax that is the Obama health care law may end up being repealed by a future Congress sufficiently motivated to boost growth. Remember too that the improving budget numbers seen today will start to go in the other direction in several years when some of the structural issues regarding entitlements kick in.
Second and most important, the Fed must end “financial repression.” The central bank must adjust its current policies to allow the price of credit to rise even if the volume support via market purchases continues. Keeping short-term credit prices at zero is creating future bubbles and market distortions, and deflating consumer income. We need to rebalance Fed money policy to allow savers to earn a modest real return and also remind the Congress that debt has a cost.
The debate is not whether we should have “austerity” but rather fiscal sanity. Borrowing and taxing more to satisfy the liberal spending agenda will only further slow the weak economy. But if we end financial repression, i.e. the Fed’s low rate policies, and look for ways to boost the private sector, at least we have a reasonable hope of some positive result. The goal of conservatives ought to be modest growth and stable prices, not the manic swings of boom and bust that the we've seen over the past decade and more.