 by Jared Bernstein |
The Federal Reserve announced a few new actions today designed to boost growth and jobs. Which begs the question: How much will these new measures help? More precisely, how much can the Fed boost growth on their own, when fiscal policy is pushing in the other direction?
We’ll get to that, but first, here are the two things that Ben and his merry mix of monetarists announced today:
• Forward guidance: They’ll keep interest rates around zero until at least mid-2015, six months longer than in previous statements.
• More bond purchases: They’d spend billions more buying bundled mortgage debt—MBS, or mortgage-backed securities—to help add liquidity and lower longer-term interest rates on the financial side of the housing market.
In a research note, economist Jan Hatzius at Goldman Sachs predicted the other day that such a program might boost GDP growth by ¼-½ point over the next year. He added:
[E]ven if the FOMC errs on the side of a more aggressive move, we expect GDP to grow little more than 2% next year, similar to this year’s pace.
In reality, the Fed did offer a strong statement implying that they wouldn’t go aviary (i.e., turn into inflation hawks) the minute growth accelerated.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.
Still, note Hatzius’s estimate of 2% GDP growth next year. In other words, even if the Fed did pretty much go all in, we’d still be looking at a growth rate that was about where we are. Which keeps the unemployment rate about where it is.
Why isn’t this stuff more effective than that? Because it’s monetary policy targeting interest rates and it needs to be complemented by fiscal policy boosting demand.
I've written about this a lot, and find it useful to think about this little box you see below, with monetary stimulus (like today’s Fed moves) on the x-axis and fiscal stimulus, like the American Jobs Act (AJA), which President Obama propsed but has not been taken up by Congress, on the y-axis.
We need to be in box 1. Ben B has also called for Congress to put us in box 1. The President, by proposing the AJA a year ago, tried to steer us toward box 1. But alas, we are in box 3.
That’s better than 4, but the fact is that stimulative fiscal and monetary policies are complements, not substitutes. Simply put, we need more consumer and investor demand to give the Fed’s low interest rates the traction they’ve lacked. They’ve set the table nicely, but the diners aren’t taking advantage of the discounted meal.
To tell you the truth, given the fact that interest rates are already really low (including mortgage rates) and big firms are sitting on large cash reserves, if I had to choose between 3 and 2 right now, I’d choose 2—or at least a neutral Fed with aggressive fiscal stimulus in the form of jobs measures. I still think that weak demand is a bigger weight on growth right now than the cost of credit, short or long-term. (Though I don’t want to overdo this point—credit availability is still constrained, especially for home loans applied for by people without stellar credit histories).
At any rate, good for the Fed. Bernanke has consistently stressed the damage done to people’s lives by the lack of job growth, calling high unemployment a “grave concern” and trying to explain to a lot of market types—some of whom are on the Fed’s board—how the benefits of these Fed actions outweigh potential costs in terms of future inflation or financial market distortions.
And I think these moves will help a little bit. That’s the good part and the bad part: We need more than a little bit of help.
Jared Bernstein served from 2009 to 2011 as chief economist to Vice President Joe Biden, and as a member of President Obama's economic team. He is currently a Senior Fellow at the Center on Budget and Policy Priorities, and an MSNBC contributor.
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Cheap money is not the answer.
Time to raise the prime rate.
2 things holding the economy from growing, dodd frank & obummer care.
The cheap money is what got us in this mess in the first place.
How much did we spend to get out of the depression? How many regulation need to go away? Deregulation got us in this mess, along with 2 unpaid for conflicts, Part D, unpaid for. A Presdident the "spent like a drunken sailor" I believe I've haerd you refer to Preident Obama. Just hear from the hous e floor, Bush deficit increase, 87%. Obama deficit increase, 47%. Who spent the most and for what?
WWII is what got the USA out of the depression.
Larry, bush spent tons as you've pointed out. Obama has spent tons. The Fed has spent tons buying bonds (interesting that the best customer for government bonds is the government). Your point is that we haven't spent enough? According to experts like yourself, bush spent a whole lot on social solutions and deregulation kept interest rates low so more people could get mortgages. So spending more on this stuff- are you a secret bush backer but just not thinking through what you are saying?
the "secret bush backers' are the ones who voted for him TWICE, and now they don't want anyone to know BECAUSE THEY ARE TOO EMBARASSED.
No, I voted for bush twice. Wasn't happy doing it, his compassionate conservatism was right out of Dems play book, but I did vote for him. May I point out the alternatives, unless you threw away a vote, we're two nimrods named gore and Kerry.
repubs have vigorously put voter I.D. laws into place.
i wish they would work that hard on helping to move the economy forward.
they CAN get stuff done when they are motivated.
The Fed is not walking away from fiscal problems they have stepped up. However now congress must act responsibly to encourage private growth through passing the Simpson-Bowles plan the AJA.
Rdd- those two bills are diametrically opposed to each other. You can't ask for both. Like asking for snow and 100 degree heat together.
What the hell does voter id have to do with anything, it does not reduce turn out and it is not a burden for people to obtain an ID to vote.
Please move on to a more worthwhile subject like the fact that cheap money and obamacare does not work and he only cares about putting more Americans on the Government Teet.
The GOP across the states that have passed these Voter ID laws are violating the 1965 Voter's Rights Act period. Voter ID needs to be crushed into the ground and wiped from the face of this earth. The conservatives have no right to suppress the vote nor require people to get new voter ID's period. States already have identification and address verification in place across America. Discriminating against people who are Seniors, those who don't drive cars or have driver's licenses, college students, and the handicapped or poor can make up as many as 10% of the voting age adults in many states. Also where is the evidence that widespread voter fraud exists? So clearly Voter ID laws are put in place to screw people out of voting who are more likely to vote Democratic. Isn't this the real reason that the GOP is trying to rig and steal the election with Voter ID? The GOP is losing and will continue to do so.
"...//www.nytimes.com/2012/09/10/us/politics/legal-battles-on-voting-may-prove-a-critical-issue-in-election.html?_r=1&partner=rss&emc=rss&pagewanted=all"
"...//www.brennancenter.org/content/resource/policy_brief_on_voter_identification/"
Just get an ID, there's plenty of time. The majority of these people have them but don't want to show them because they have outstanding warrants or because of their citizenship status.
SCOTUS has already ruled once that VOTER ID is legal...oh yes, it was a 6-3 vote.
When these other cases come up, we will see whether they continue in the same direction..
just saying...
The Congress has failed on two accounts to promote fiscal job creation. The first as Mr. Bernstein pointed out was the need to pass President Obama's American Jobs Act. President Obama proposed the American Jobs Act last August, 2011. The GOP House sat on its butt and did not pass it. The American Jobs Act would have created or saved two million jobs. The saved jobs part is important because many public sector workers have been laid off such as teachers, police, fire, and city workers. The other failure of Congress was the GOP filibuster of the Small Business Tax credit bill. This bill would have created over one million jobs in the private sector. Three million lost jobs are what Mr. Bernestein is talking about on the "Y axis" of his box.
I also would like to point out the failure of the GOP House to pass the Senate's Farm Bill. The Farm Bill is a five year, trillion dollar bill that is essential for our farmers, ranchers, agribusiness concerns, and Main Street businesses that serve agricultural communities. We are looking at the worst drought since the Dust Bowl across more than one thousand counties across America. The last thing a farmer, rancher, or Main Street businessman needs is more uncertainty about whether they can stay in business or not. The GOP House has done a terrible disservice to our farmers, ranchers, and Main Street business economy by failing to pass the Farm Bill. The GOP/Tea Party House is failing to get the American people's business done. I think its time for new management in the House. Can you say "Speaker Pelosi?"
Rex, again, you strike with precision and clarity! Thank you.
This action should provide some near term stability and certainty to the economy. It is up to the voter now to elect representatives that will work for the best interests of the country, not for their own selfish greed and lust for power.
The cause of today's slow recovery is fear of the future, not imperfect fiscal or monetary policies. Fine tuning policy might actually work against us because it suggests that the Fed doesn't know how to grow the economy. They don't, or can't, and Beltway Republicans like it that way because it conflates with their goal of getting rid of Obama. Consumers don't consume because they fear losing their job(s); investors don't invest because they fear they will not get their money back, never mind dividends and interest. It is a win-win for Republicans inside the Beltway: Cause uncertainty and fear by refusing to work with anything proposed by the Dems, especially if proposed by Obama. Then blame him for not fixing the economy, never mind that it almost collapsed in Sept-Oct 2008 owing to policies they helped establish before Obama was elected. They know that pinning it on Obama might get rid of him... maybe even win big in Congress and the Senate. I am not a Democrat, but will vote the straight Demo ticket in November.
People have caught onto their little game now, so I don't think anybody but Repubs are going to be fooled. At least I hope that's the way it 's going to work. And thanks for voting Dem to help your country!
I'll gladly pay you Tuesday for a hamburger today.
I am part of the 47% that Mitt Romney could care less if we fall off the planet. What he doesn't understand is that without Medicaid I could have died. I have had to undergo 5 open heart surgeries with only a 20% chance to live. One of the surgeries was nine hours long. I also have a "Pace Maker"because I have A-Fib, I take medication to slow down the heart rate, but to ensure that it doesn't stop the PaceMaker keeps it going. I am also on disability and food stamps... I guess to Mitt Romney and his party I am a "Waste of Money" I contracted an abnormally high fever at seven or eight years old and it destroyed my heart valves (I had the same surgery as Barbara Walters, only more). But at 60 years old I am thankful for President Obama, who CARES about 100% of the people. Even thou my surroundings were and are very humbling, because I really want to pull my own weight, I saved my few dollars and "Family and Friends" help me to pay for school. with bandges on my chest I went back to "MinistrySchool" and earned a BACHELOR of THELOGY and a BACHELOR of RELIGIOUS EDUCATION, after the third open heart surgery I went back to school and earned a MASTER of RELIGIOUS EDUCATION, after the forth surgery, on April 24, 2010, I earned a "DOCTORATE of SACRED THEOLOGY" and on June 6, 2010, I was ORDAINED as a PASTOR, Therefore, I counsel many people and my aim is to inspire them to never give up and if they have thrown in the towel to collet every towel, because with every new day comes new opportunities for a better day. I sincerely pray that President Obama never gives up and will fight hard and win this race, more now than ever, because us 47% and in fact all 100% of us need to be confident that if we any kind of health care, something to eat or a helping hand, that our President has compassion for us all.