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.