Which Cliché to Pick?

Decisions, decisions.  Reading the Fed statement today, I was struck by how many clichés were available to translate Fedspeak into normal speak.

“Pushing on a string” comes to mind when you read the brand-new phrase added to the sentence on current economic conditions:

“including low rates of resource utilization,
subdued inflation trends, and stable inflation

Alan Greenspan was the Fed chairman with only a  hammer – rate cuts – so every problem looked like a nail.  Stock market crash because “portfolio insurance” didn’t work? – cut rates.  Old COBOL programs on some computers used only two bytes to define years? – cut rates.  Terrorists fly planes into buildings? – cut rates.  Unemployment rises? – cut rates.  You get the idea.

The problem with the Alan Greenspan approach is that the nail eventually gets driven so far that you can’t hit it with your hammer any more.  That happened a year ago next month.

Bernanke came up with a new tool, solipsistically called “quantitative easing.”  I think calling it a screw driver is correct, because of the obvious effect on taxpayers and savers when he started using it.

We should admit, though, that the market loves it whenever the Fed gets out its hammer or screwdriver.

My favorite part of this game is market leaders’ reactions after they’ve already taken profits and bonuses from the pumped-up market. Those very same people turn around and say to the politicians “that’s another fine mess you’ve gotten us into,” as if it wasn’t them that pushed their house organ, the Fed, into creating that mess.  (Apologies to Stan and Ollie for the mis-quote, but as a cliché the quote has been mangled.)

So when the Wall Street Journal or CNBC tells you that we need more corporate tax breaks to fix our suffering economy, I’m here to say they know (or should know) that is not true.  The Fed has admitted that corporate tax breaks will not help at all to stimulate this economy.  That would be textbook pushing on a string.

When capacity utilization is abnormally low, and inventories still too high, there is exactly zero incentive to add to capacity.  The only thing that corporate tax breaks will do now is make the situation worse by adding to the debt the citizens are expected to pay.  It would, of course, help the owners of corporations extract more profits from a shrinking economy by lowering their costs even farther, but it won’t grow the economy one whit.

We need more demand.  More demand comes from households, governments and companies.  Households need more spendable money to increase their demand.  Governments need more tax receipts to increase their demand.  Companies need more customers to increase their demand.  What we need is wage inflation.  That will create more income for consumers, more taxes for governments, and more customers for companies.

A couple years back I was moved to call a buddy at one of the most influential think tanks in Washington with the suggestion that a stimulus package was going to be needed to head off a looming disaster in the subprime mortgage market.  I suggested a payroll tax holiday.

It would help the lowest wage-earners and their employers the most, giving them an immediate boost of over 7% in take-home pay (or payroll savings for the employer). That $200 a month for the lower quartiles of the income spectrum was enough to cover their subprime mortgage increase, if they had one.  If they didn’t, they could buy their kid an I-pod, pay down credit cards, or swing a car payment.

It also served nationalistic impulses by not rewarding any company that had moved its labor costs overseas.  It also worked out to a huge working capital benefit to small businesses, most of which operate as self-employed taxpayers filing and paying quarterly taxes.  For those entrepeneurs, a 15.3% increase in their income for a quarter is actually enough to make meaningful expansion plans.

While it would have had the best impact then, in mid-2007, such a move would still be sensible today.

And please, no sanctimonious false piety about how those taxes are for Social Security and Medicare.  Back in the 1980’s, the payroll tax was covering the current obligations of the Social Security and Medicare systems, and then some.  That didn’t stop the policy-makers from quadrupling that payroll tax back then, allegedly to avoid future insolvency.  What did they do with the extra money?  They spent it.  They spent it on the military, on agribusiness, and most especially, they spent it on tax cuts for those who don’t get W-2 income.

My back of the envelope estimate is that we need about 50% total wage inflation over time to catch up to the inflation we all feel that didn’t get included realistically in the CPI or our paychecks these last couple of decades.  That would be the cost out of pocket that we pay for education, health care and housing, to name three things most of us can’t decide not to purchase.

No matter what policy choices we make that increase wages, we need the Fed to resist the temptation to try to stop that kind of inflation once it starts.

Maybe we should take away the Fed’s toolbox, given how we get alternately hammered and screwed when they use them.


3 Responses to Which Cliché to Pick?

  1. Tom D says:


    Three policy choices conceivably within the political powers of the U.S. Government and which together would stimulate domestic demand by increasing wages are:

    1. Greatly increasing the numbers and the percent of workers employed by government at all levels.

    2. Repudiating or gradually withdrawing from international free trade treaties and re-instituting large import duties.

    3. Effecting a very large overnight devaluation of the U.S. dollar and a return to fixed exchange rates.

    These are, of course, the three major thrusts of Hoover’s and Roosevelt’s policy changes in the 1930’s which did revive the economy from 1934 to 1937 which might well have continued but for the drums of war in Europe starting in 1937-38.

    Republicans and Democrats alike have leaned toward the first solution, governent payroll expansion, for many decades now since it results largely in increased consumer demand and no increased supply.

    Republicans have favored globalization and free trade, but this has inevitably resulted in narrowing or equalizing the wage gap amongst the major trade nations. Democrats have always opposed this movement or have reluctantly accepted it as a part of overall world growth.

    The currency gap has been artfully exploited by Asia and others for decades to the point of destroying the U.S. on-shore manufacturing economy and forcing U. S. wages inevitably toward Asian levels. No amount of international prodding or discussion has solved this currency exchange rate issue. This is where the massive overnight devaluation comes in.

    Increasing government payrolls has some eventual limits, as well as being a straightforward contribution to a net tax deficit to government. Traditional Democrat measures to assist unions in penetrating the workforce and demanding higher wages will only drive more (larger) corporations overseas or (smaller) simply out of business.

    These are radical solutions, but given the new administration’s decision to withdraw from many expressions of U.S. dominance across the world, I think this is where we may be headed. It would require absolute and persistent majorities in both houses of the Congress and total inflexibility in responding to the howls of world criticism. And it would inevitably lead to massive retaliation. Everyone can agree on growing government payrolls. Not everyone will agree on tariffs and a major devaluation. But it may be one of the few ways out of the corner we have allowed ourselves to be painted into, or so it would be presented.

    Personally I do not favor this approach as outlined, but if the current administration can retain its voting power and momentum, this is a quite possible eventual result. The far more likely outcome is steadily worsening inflation which is far easier to administer, has fewer innate enemies, and would more gradually achieve the same goals.

    • hhill51 says:

      Tom –

      This is why it’s so much fun to discuss the K-wave. We can have the same discussion for 10 years, and still not know the answer…
      If you’ll recall back in the Colorado group when I was going on about debt de-levering, I thought competitive international devaluations would be the Smoot-Hawley analog coming out of the mess. I still generally feel that way, and have to give you props for predicting the attendant commodity-driven inflation.
      I’ve been thinking of yet another “policy choice” that has the benefit of being implemented whether our politicians want it or not. That’s a shift in international reserve currencies to an energy-based conversion standard. In other words, Dollars get revalued in BTUs/KWh’s/BOEs, as do other currencies. The beauty of this is that, unlike gold, there really is enough energy to provide the float to denominate the world economy. Better yet, if you have energy, you can increase value by moving things, making things, fertilizing, heating, refrigerating, etc. Holding currency would give you the ability to directly increase wealth.
      Maybe a good new thread topic here…

  2. Tom Drake says:


    Oddly enough we were both correct in 1999. The first major de-levering (technology) was about to occur at the same time that inflation re-ignited in commodities (gold, oil, etc.) The K Wave story had always accepted a seven to ten year topping process (examples: 1921-29 and 1974-81) as a normal event, but had failed to recognize that the bottoming process was also not V-shaped (examples 1932-42-49 and 1998-2003-2009).

    Actually my mildly tongue-in-cheek neo-Swiftian proposal above was written not with K Wave in mind, but from the imaginary point of view of an all-powerful central banker and a charismatic political leader. Inflation is imbedded in our governing cultures and economies since 1933 just as deflation was imbedded in the 19th century and up to 1933. A profligate culture in all ways finds inflation useful and much safer than deflation. So even if we weren’t already in an inflationary upswing before last summer (and since 1999), we would have to have one to evade the overwheming debt that can never be paid in currencies which are basically worthless to hold at any stage. This isn’t a value judgment and never was for me. It’s just a recognition of how things work which improves my own family survival odds against the necessary evils of taxation and currency debasement in a dangerous culture run wild.

    Since these cycles are once in lifetime event changes for most people as adults, few of us have useful experience. What I have learned is that the natural tendency of inflationary and deflationary long term trends to revert to the mean are amplified by banking and economic policy makers who are oblivious to and ignorant of the actual cycles. From my point of view we can safely bet on inflation.


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