OUR MISSING MACROECONOMIC POLICY

Fiscal policy is not just, or even principally, the purview of the president. ~ Carly Fiorina

 

Appropriate fiscal policy has been missing-in-inaction (MII) since 2009. Every Econ101 student learns there are two complementary, federal macroeconomic policies – monetary and fiscal policy – that the government uses (ideally) to keep our nation's economy in "just-right" balance (not too much unemployment, not too much inflation). Monetary policy concerns changing the nation's money supply mostly by altering interest rates. Fiscal policy involves changing government spending and taxes through Congressional legislation.

All political eyes were focused last week on monetary side of macro policy. Fiscal policy remained the unspoken elephant in policy-makers' rooms, as it has for all too long. Why monetary policy? Because Janet Yellen was talking.

It was interesting to hear Ms Yellen testify before the Senate Banking Committee. She is expected to be the next Chairwoman of the Federal Reserve Bank (the first time that title has been used at the Fed). But before she receives the monetary scepter as this nation's (and the world's) primo central banker – and be in charge of US monetary policy – she needs to be confirmed by the Senate. Hence her testimony.

During her tenure on the Federal Reserve Board –as vice-Chair for the past 3 years and President of the San Francisco Federal Reserve Bank from 2004-10 – she has generally supported Fed's and Ben Bernanke's innovative, expansionary and controversial monetary policy called quantitative easing (QE). She has been correct in her support. Most recently, QE has involved buying $85 billion per month of long-term Treasury bonds and other financial assets to stimulate the economy. As a result of QE and other financial activities, the Fed now has more than $3.59 trillion of financial securities' assets on its balance sheet. Before the 2007 recession, the Fed held between $700 and $800 billion of Treasury note assets on its balance sheet.

Several senators questioned her testimony and implicitly her qualifications. Two of them, Senator Bob Corker (R-TN) and Senator Sherrod Brown (D-OH) characterized the Fed's QE-based monetary policy as “an elitist policy” and “a sort of trickle-down economics," respectively. They said monetary policy only helps the well-to-do Americans who participate in the (now rising) stock market rather than middle-class folks whose finances are far more precarious and puny. They have a point.

But politicians like Sen. Corker deserve gold medals for extreme hypocrisy and ironic blindness. The idea that a Republican Senator was berating Ms Yellen of implementing "elitist policy" would almost be humorous except for the huge harm Republican politicians like Sen. Corker have loaded onto working Americans during the past 4 years – because of their caustic, elitist policies. Recent examples include opposing increases in Federal (and state) minimum wages, drastically reducing funding for the food stamp (SNAP) and low-income food and nutrition (WIC) programs and opposing increased infrastructure spending. Such policies are terribly hurtful snap judgments.

If these senators want non-elitist, non-trickle-down economic policies, they themselves can create them – they're called fiscal policies. Republican and Democratic congress folk should wake up from their stupor and pass a fiscal stimulus bill, based on fiscal policies that have worked in the past.

Instead, after taking the Congressional hypocritical oath ("do no harm to those who pay for my re-elections"), Congress continues to sit on its thumbs and criticizes prospective monetary policy-makers like Ms Yellen for not doing what Congress itself (and President Obama) should be doing. Successful expansionary fiscal policy would offer much more broad-based economic benefits that come from directly increasing employment, putting more money in the wallets of middle- and working-class people and providing necessary support to folks who can't afford food, care and/or housing.

Why does fiscal policy remain MII? Why doesn't Congress authorize expansionary economic policy? Have its members forgotten what fiscal responsibilities they have? Not likely; it's because many of its members are too duplicitous and ideological to do what's needed for the public at large. They remain falsely fearful of non-existent inflation from ever-moderating deficits.

Ms Yellen was too demure in not forcefully stating to the Banking Committee that the Fed – soon to be her Fed – cannot by itself pull the US out of its continuing economic malaise with only its monetary efforts. Congress must re-activate its fiscal authority by passing substantive expansionary fiscal policy legislation. This means lowering taxes for the 97%, increasing government expenditures to improve infrastructure like roads, bridges and the internet, providing more employment-training funding, especially for the long-term unemployed, and increasing SNAP and WIC budgets. Senators Corker and Brown can rest assured these fiscal expenditures will not be elitist or trickle-down policies.

We would have all benefited from hearing Ms Yellen clearly describe the elephant in room and tell Congress to get on its fiscal stick and start doing its part to revitalize the economy, rather than berating the Fed for not doing Congress' job.