The Fed's Easy Money

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The Federal Reserve has heeded calls for more “quantitative easing.” It will create still more high-powered (bank-reserve) money by buying more government bonds. That is a bad policy.

Perhaps untypically, the current recession is not of a sort that more easy money would remedy. A liquidity shortage is not the problem, and worries about actual deflation are curiously short-sighted. Already the banking system could multiply the stock of ordinary bank-account money on the basis of the stock of reserve money already greatly expanded by the Federal Reserve. That could and would happen if bankers and borrowers had confidence in business and regulatory conditions.

Two words used above need explaining. “Recession” means more here than just the downward phase of the business cycle. Even after the economy has hit bottom and has begun recovering, it is still in recession as long as subpar business conditions drag on. This is the popular use of the word. The word “untypically” draws a contrast between the current recession and most earlier ones. Those apparently did trace to a slowdown or reversal of money-supply growth.

Actually, too loose a Federal Reserve policy seems to have figured in the background of the current recession, along with artificial pro-home-ownership policies that contributed to a speculative housing bubble. The latter was a real factor — “real” in a sense contrasting with “monetary” and more fully explained below.

Now, notoriously, businesses and consumers are hanging onto money and near-moneys (cash and equivalents) instead of spending them at a rate that would restore prosperity. The velocity of money — the income to money-supply ratio — has fallen, whatever one plausibly counts as money. This demand to hold money has strengthened only passively, however. Individuals and companies, by and large, are not deliberately restraining their expenditures to build up cash balances they consider inadequate. Instead, they are postponing expenditures for lack of attractive opportunities. Meanwhile, they are left holding cash and equivalents by default.

These sources of uncertainty are real, not just monetary. Real factors explain why some countries are economically advanced and others economically backward.

But why this postponement? Worry about how long a recession will drag on is an old story.  Now, moreover, uncertainty prevails about how government policies will raise business costs and erode job and profit prospects. Health care, financial regulation, cap and trade, various “green” pressures and subsidies, taxes, deficits and debt, widespread economic ignorance, and a perceived hostility toward big business are causes for concern. One hears about this crippling uncertainty from all sides (as from business executives interviewed by Charles Gasparino).

These sources of uncertainty are real, not just monetary. Real factors explain why some countries are economically advanced and others economically backward. These real factors determining production and growth include more than just material ones such as labor supplies and skills, natural resources, and technology. They also include entrepreneurial alertness, competitiveness, mobility of labor and other resources among employments and places, taxes and regulations, and various other institutions and policies that promote or impair intersectoral and intertemporal economic coordination. Real factors determine the “natural rate of unemployment,” the frictional unemployment that persists even during prosperity.

Now, a sound old tenet of monetarism — the monetarism of Warburton, Friedman and Schwartz, Brunner and Meltzer, and others — is that monetary policy cannot remedy real impediments to prosperity and growth (except perhaps only temporarily and unsatisfactorily, as noted below). Far from celebrating any wondrous potentials of monetary policy, monetarism warns about the damage that bad policy can cause and often has caused. It warns against destructive stop-and-go oscillation between fighting unemployment and (belatedly) fighting inflation. Monetary policy should concentrate steadily on what it can do, on preserving the value of money.

Admittedly, a sufficiently expansive monetary policy could offset a fallen velocity of money, even of the present fear-based passive sort. People’s willingness to accept and just hold money is not unlimited. The Federal Reserve could make the economy so awash with money that people would spend it even though they worried about real conditions and because they feared inflation. Banks would activate their ample idle reserves, so creating more money.

The equivalent of Milton Friedman’s metaphor of helicopters dropping bale upon bale of freshly printed money could reinforce the great potential for money creation and spending expansion that already exists. But how unsatisfactorily! More monetary expansion would threaten severe price inflation, causing distortions and discoordinations of its own. At worst the dollar would collapse as foreign central banks unloaded their great holdings of US bonds.

Finding the proper dosage and timing of aggressive monetary expansion would be a hopeless challenge. Already it is hard to see how the Federal Reserve might find an “exit strategy” from its swollen balance sheet.

In summary, easy money (like fiscal “stimulus,” by the way) is no cure for “real” defects of economic structure and policy. Bewailing the lack of jobs, though amply justified, is no diagnosis and no remedy. Lack of a politically easy way to undo bad policies is no excuse for making things worse.




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The Limits of Victory

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American voters rebuked the president’s impatient leaps toward statism by ending his party’s control over the House of Representatives. This is important: Obama’s ability to force ill-conceived bills into law is gone.

Yet voters showed restraint, even in their rebuke. Some of the candidates who had been the most strident critics of the president did not win their elections.

Much attention was paid to the race for the U.S. Senate seat in Delaware, a seat left open when Joe Biden became vice president. Biden had tried to stage-manage events so that his son could take over in a few years. Roughly stated, the scheme was to arrange the election of an ancient and amiable Republican “moderate,” who would keep the senate seat warm for Biden fils. Local voters, sensing and resenting the scheme, booted the seat-warmer and chose one Christine O’Donnell in the GOP primary. If nothing else, she and her supporters should be applauded for foiling Biden’s dynastic ambitions.

Statist media types insisted that Ms. O’Donnell was a “face of the Tea Party” movement for the 2010 elections, but this was an exaggeration. Although she did have the support of one large Tea Party group, Rush Limbaugh, and (relatively late in the process) Sarah Palin, O’Donnell never seemed comfortable making the case for limited government. In fact, she never seemed comfortable at all. She stumbled into several statements that made her sound like an inexperienced religious fundamentalist.

O’Donnell is a particular sort, fairly common on the coasts and in college towns. She’s a contrarian who lives by the feud with “liberals” and establishment elites. Rather than ignoring their barbs, she engages statists on their ground — bickering over trivia rather than making affirmative arguments. Example: during a critical televised debate, O’Donnell artlessly (though correctly) made the point that the phrase “separation of church and state” does not appear in the constitution. Her opponent, an effective rhetorical mechanic, was able to make her precision sound like small-mindedness. He won the election easily.

When the unions figure out that their precious pension systems are underfunded (nay, bankrupt), they’re going to march up and down the Strip with Harry’s head on a pike.

Much attention was also paid to the race for the U.S. Senate seat held by shady cretin Harry Reid. Sharron Angle, another “face of the Tea Party” and a former state legislator from Reno, mounted a credible challenge to the sitting Senate majority leader. In front of smaller groups (including FreedomFest last July), Angle made an effective case for limited government. But, like O’Donnell, she wasn’t very smooth in front of cameras.

More importantly, Reid counted on his sleazy Big Labor masters in the Las Vegas area to mobilize the minions. On election night, a talking head on one of the cable television channels boasted that Labor “really flexed its muscles” for Reid. Asked which unions, particularly, got out the vote, he said, “SEIU, AFSCME, and, uh, the AFL-CIO.” In other words, two government-employee unions and an umbrella organization that includes . . . government-employee unions.

Reid’s retention of his seat (and his party’s retention of a narrow majority in the Senate) was a triumph of sullen government clerks. When these people figure out that their precious pension systems are underfunded (nay, bankrupt), they’re going to march up and down the Strip with Harry’s head on a pike.

The real face of the Tea Party, an election-eve winner who will likely make life difficult for Reid and others, is Kentucky’s senator-elect Rand Paul. The son of Texas Rep. Ron Paul (and, like his father, a medical doctor), the new Gentleman from Kentucky has already been battle tested. During his campaign, he stuck to his critique of the “public accommodations” language in the Civil Rights Act. This was a courageous and coherent criticism of a troubling section of black-letter law. Paul made it and won. He should do a lot to keep the statists of both major parties honest.

But the key to keeping the statists in check will be the House of Representatives, not the Senate. And the new speaker of the house will be Ohio Rep. John Boehner. Not known as a small-government idealist, the new speaker did make some heartening comments in the hours after the GOP reclaimed the House. He restated his opinion that Obamacare is a “monstrosity” that he would like to overturn.

The manner in which he tries to do this will be important. The whole law needs to be revoked and rescinded. Parliamentary compromises and budgetary tricks aimed at trimming the edges will not be enough to save the country from the mischief that this perverse “reform” is already causing.

Lastly, it’s worth noting the president’s press conference on the day after the midterm elections. Living up to his burgeoning reputation for being thin-skinned and petulant, he hemmed and hawed on the matter of his role in his party’s congressional losses: “Some election nights are more fun than others. . . . We lost track of the ways we connected with the folks who got us here in the first place. . . . I've got to do a better job, like everybody else in Washington.”

In moments of adversity, Obama’s rhetorical skills vanish. He sounds and looks like a man who’s been graded on a curve his whole life.

Sixteen years earlier, in similar circumstances, Bill Clinton called a press conference and took responsibility more directly and emphatically for his party’s losses. After that press conference, he changed the course of his presidency, proceeding pragmatically through a reelection and second term. But Barack Obama is no Bill Clinton.




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A Nice Surprise

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Unnoticed by the mainstream media in the flurry of election coverage was a quiet victory in Arizona. There voters approved Proposition 107, which bans racial quotas and other preferences by state government, Arizona thus becomes the fifth state to do so (after California, Michigan, Nebraska, and Washington).

And the vote wasn’t even close — Prop. 107 got nearly 60% of the vote.

I would have hoped that by now every state would have outlawed reverse discrimination (more appropriately characterized as “revenge quotas”). But I try to savor victories as they come.




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Google's Tax Dodge

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Curiously, most of the money that computer and internet-related companies give to political causes goes to Democratic candidates. For example, of the $12.9 million the high-tech industry contributed to candidates in this election cycle, over two-thirds ($8.4 million) went to Democrats.

A particularly strange case is that of Marissa Mayer, a top executive at Google. She held a fundraiser at her mansion to help Democratic politicians. Guests paid over $30,000 each to attend. Obama was the star performer, and had nothing but praise for Google. Amazingly, he showed none of his usual business bashing. The intense love shown on both sides was deeply touching. Who would have thought that these captains of industry would support so staunchly a man committed to raising taxes on the rich?

Mayer was not unique in her support for our neo-socialist president — 75% of all donations by Google employees went to the Democrats.

Yet even as the Google crew partied with Obama, news surfaced showing that Google had used tricky strategies to pass most of its foreign profits through Ireland and the Netherlands to Bermuda. These strategies — with cute names like “Double Irish” and “Dutch Sandwich” — saved Google over $3 billion in taxes, lowering its effective overseas tax rate to a measly 2.4%.

So it is that even as key elements of Google’s management attempted to help elect the party devoted to raising taxes, especially on the hated rich, the corporation itself dodged taxes artfully. Pretty slick for a company that has the boastful motto, “Do no evil.” It should be, “Pay no taxes.” And while they’re at it, maybe the Google high-fliers should google-search the word “hypocrisy”...




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The Lonely Lunch Bucket

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Usually when one side in politics loses big, its defenders will deny that the people rejected their ideas.

Republicans said so in 2008 and partisans of the Democrats began saying so even before the election of 2010.

Here is Michael Lind, writing in Salon (November 2). He notes that the Democrats have joined other center-left parties in Germany, Italy, France, and Britain in electoral banishment.

The reason, he argues, is that all these parties “abandoned their traditional working-class constituents in order to woo bankers and professionals.” Instead of pushing for more social benefits and a higher minimum wage, they have embraced the market and refocused their progressivism on “non-economic causes like renewable energy, mass transit, the new urbanism, gay marriage, identity politics and promotion of amnesty for illegal immigrants.”

The Democrats have hardly given up on social benefits — see Obama’s health-insurance law — but they did go for renewable energy, gay marriage, etc., as Lind says. They do have pals on Wall Street — and more of them perhaps than they traditionally had (though even FDR had his Bernard Baruch). But imagine if the Democrats had defined themselves exclusively as a pro-union, lunch-bucket Hubert-Humphrey-and-Walter-Mondale party. They would have been even deeper in the woods than they already are.

The gist of Lind’s argument is that the Democrats are losing because they don’t have the courage and wisdom to agree with Michael Lind. That argument allows Lind to make the further claim that the people do agree with him. And some do. I know them — and they are feeling politically very lonely.




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