The lede from a WSJ article yesterday made me laugh – conservatives continually harp that Ben Bernanke and the Fed must do all in their power to curb the inflationary tendencies associated with the coming economic recovery. Of course, no inflation has arrived, and neither has economic recovery – the US is in a deflationary period. But this doesn’t stop the WSJ now complaining of the Fed’s inaction in dealing with unemployment. The paper finally takes the Fed’s inflation targets at face value – a rare occurrence.
But this raises the question – what can the Fed actually do to combat the recession now? Monetary policy is a blunt hatchet – lowering interest rates makes borrowing easier across all sectors of the economy, but isn’t guaranteed to work. In this analogy, fiscal policy is a scalpel. Congress can target individual economic sectors – construction, for example, can be boosted through infrastructure expenditures. Unfortunately for us, neither looks likely to happen any time soon. Interest rates are now at their lowest, and a second stimulus (despite statements to the contrary) is dead in the water. And even if the Fed or Congress did manage to take action of some sort, it would be far too late now to affect the economy before the the end of the year.
What else is left when policy fails? Politics. In a utopia, the benefits of a particular policy would be obvious to completely rational, politically-engaged citizens. But that’s not how it works. The only way for the Obama administration to inspire confidence in the public is to act confidently. Those who are actually committed to sane economic policy (i.e., not deficit hypocrites who would vote for the 2001 and 2003 tax cuts) need to think big – rebuilding America big – because politics, unfortunately, comes before policy.