Even if a central banker is all you ever wanted to be, you’d have to think twice as you head for the Federal Reserve’s annual symposium in Wyoming later this week. After seven years of quantitative easing and inflation targeting, the Fed is riding an exhausted horse and seems to have no clear idea where to find a new mount.
Nothing brings home the urgent need for a new strategy more than the unfolding crises in Europe and Japan. Both are heavily invested in QE and near-zero interest rate policies, and both are skidding badly.
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Managing rates to achieve a 2 percent inflation target—a policy Ben Bernanke introduced in 2009 when he was Fed chair—isn’t enough to pull the industrial economies out of the trough of low growth. This has been increasingly clear since last spring.
While the U.S. economy is now healthier by a long way than either Europe’s or Japan’s, its policymakers face the same music. It may be politically touchy, but aggressive stimulus is the only way out of the shared malaise.
More than merely ineffective, monetary easing by itself now turns out to make the growth outlook worse in a variety of ways. Translation: Standing still is going backward.
“Central bankers are late to this logical conclusion,” Bill Gross, portfolio manager at Janus Capital, wrote last week in the Financial Times.
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Here’s an illustration of the argument Gross and others now make. Interest rates at Eisenhower-era lows were supposed to spur increased corporate borrowing that would raise rates on capital investment. That, in turn, would keep productivity expanding at a promising clip. Instead, corporations have spent heavily to buy back stock and improve investors’ dividends. Productivity gains—no mystery—remain below pre-crisis levels.
The problem is right in front of us: Nobody factored in the ideological dimension—the extent to which balanced budgets are a matter of deeply held belief or, in some cases, law. “We are not ‘all Keynesians now,’” Gross said.
That remark goes straight to the point. Global policymakers have to get beyond “the vernacular of austerity,” as Melvyn Krauss wrote in a recent Bloomberg column, “to put together policies for growth.”
Make that a vigorously anti-ideological commitment to aggressive, stimulus-based growth strategies, with government spending in the lead, and you’ve got the bedrock solution to our “new normal” of low growth, low productivity, and stagnant incomes.
Several alternative central bank strategies are in the pre–Jackson Hole breezes. One is to proceed into “NIRP,” a negative interest rate policy, but the Europeans and the Japanese, who were in and out of recession long before the 2008 crisis, are proving this pretty decisively a bust.
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The Abe government and the Bank of Japan, indeed, are said to be considering turning back from the strategy they introduced last January. In Europe, NIRP is hitting financial institutions hard, and banks aren’t passing reduced costs on to consumers. Mario “Whatever It Takes” Draghi, the ECB’s president, simply isn’t getting a lot of bang for his euro.
John Williams, president of the San Francisco Fed, just made a splash with this thought: Raise the inflation target a percentage point or two to give the Fed more room during a recession. If you set a target of, say, 4 percent, this reasoning goes, you’re more likely to achieve the 2 percent more or less all central banks now seek.
A fourth idea makes nominal GDP—let’s say 3 percent to 4 percent—the target by which the Fed determines policy. Popular among the conservative think tanks, the point here is to relieve the Fed from having to jawbone the markets every time it contemplates a rate rise.
Some smart people stand behind these proposals. But each fails to address the problem that weighs on all others: Until policymakers take on the question of chronically lagging demand, they’re unlikely to be able to fix anything else.
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The ECB’s commitment to quantitative easing delivers palsied results because there are no complementary policies to propel the EU economies past their enormous unemployment problems.
What’s missing? It’s easy to spot in Europe’s case: Stimulus spending in a variety of forms. Williams calls for “ad hoc stimulus during recessions,” but that’s far short of the “paradigm shift” we’re at least starting to discuss.
It’s fiscal policy’s turn, in short. This means government outlays (or tax reductions) that take on our “secular stagnation,” as Williams calls it, with full force. Infrastructure spending as a spur to investment and expansion (and a source of jobs) is an obvious example. It’s at a 30-year low, and both presidential candidates call for increases.
But their numbers pale next to the $3.4 trillion needed through 2020, according to the American Society of Civil Engineers, which would come from a combination of federal, state, local and private funding.
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Hillary Clinton’s commitment of $275 billion over 10 years falls short of what’s needed by the federal government. Donald Trump says he’ll nearly double that amount to about $500 billion, presumably over the same time period.
Vladimir Signorelli, president of Bretton Woods Research, looks at the productivity conundrum this way. A company with 100 employees finds a technology that turns out the same amount of product with 75 employees. “That counts as a productivity gain,” he says, “but there are 25 more people out of work.”
There are plenty of indications that the Fed understands that it has taken monetary policy by itself as far as it’s going to go. But there’s just as much to suggest the Fed’s top officials don’t know where next to turn. It’s a little ironic given the history of the idea, but Americans didn’t adopt so pure a version of austerity as the EU did as the crisis hit in 2009 and didn’t carry it as far.
No coincidence: But the lessons should be clear as the Fed meets (and as we listen to our presidential candidates). There’s no more place for idealistic rhetoric and time-consuming “trickle-down” gambits. The time for Signorelli’s paradigm shift is now.
