by Fergus Hodgson
Director of Fiscal Policy Studies
Central Banks Offer No Saving Grace
Monetary "stimulus" is just as impotent as fiscal "stimulus"
The atrocious state of the federal government’s accounts — more than $1 trillion in annual deficits and no budget in three years — is rightly commanding skepticism of even deeper deficits to "stimulate" the economy. The reality is that such profligate spending fosters cronyism and vote-buying, and in an evermore obvious fashion.
That does not mean, however, that monetary stimulus is the answer. A recent report from the American Enterprise Institute demonstrates why. While not addressing the underlying legitimacy of or need for a fiat currency and central bank, it does pose the more pressing question, "What can central banks do?"
The short answer is, not a lot of good. The Federal Reserve has made plenty of efforts to expand the money supply, with more similar measures on the way. These have facilitated more government spending and the thinly veiled and counterproductive inflation tax — but they have achieved little if any noticeable improvement to GDP measures.
"The persistent inability of the Fed to stimulate aggregate demand makes it difficult to escape the reality that the US economy is stuck in a liquidity trap," writes John Makin. That’s when further expansions of the money supply have shown themselves to be ineffective.
To compound their failure, central bank officials have claimed this year that they would "address fundamental structural problems…" In other words, they’ve promised more than they can deliver.
"The [Federal Reserve]’s specific aim is to reduce the US unemployment rate and to boost economic growth," Makin notes. "Absent the announcement of concrete measures to achieve these goals — which are arguably outside the usual scope of central bank policies — markets were at first disappointed." Market participants better get used to being disappointed, because at the same time the Federal Reserve’s mandate includes price stability.
Even if the Federal Reserve could somehow boost employment and economic activity, its multi-layered mandate conflicts with itself. It is also out of touch with relatively more successful central banks. The Reserve Bank of New Zealand, for example, has price stability as its sole responsibility.
Inflation targeting may rule out attempts at monetary stimulus, but that is positive recognition that central banks do not create jobs. Rather, when they inflate, they create uncertainty and instability. Even Ben Bernanke back in 2001 strongly endorsed inflation targeting as superior to current Federal Reserve and European Central Bank practices.
With a limited view of central banking understood, legislators and constituents can then focus on legitimate reforms and not be distracted by false promises. As Makin correctly recommends:
The United States, notwithstanding additional easing by the Fed, still needs to manage the fiscal cliff while moving toward a medium-term sustainable fiscal policy that includes lower marginal tax rates, a broader tax base, and a lower projected path of government spending.
Why are young people looking abroad?
Over the long weekend, I came across two articles from young people who were voicing frustrated criticism regarding their prospects in the United States. While I don’t endorse all they had to say, there were recurring themes that merit attention.
One of these writers I came across is finding his freedom outside of the United States. What does it tell us when other locations offer better opportunities for young people than America does? In fact, Australia and Canada already have far higher rates of net migration than the United States.
"No longer are you a parent that must be respected, but a business transaction that must be evaluated," writes Michael Fielding of the University of Texas. "Well America, your benefits don’t outweigh your costs. You do more harm than good." Fielding is particularly frustrated with the plight of Social Security.
When people got scared about retirement, you gave them Social Security. The price: enslaving the next generation. You put the bill on the backs of their children before they were old enough to vote, and the only choice you provided was pay up, leave or live in a metal cage.
Not surprisingly, he’d prefer to pass on the metal cage.
"All my life, I have never experienced a time of peace, prosperity, and freedom," writes Sarah Harvard of American University. "I live in an era of recession, restricted freedoms, and war… [Government officials] have taken away our right to property and prosperity, and they have tricked us to believe that capitalism is not only equated to corporatism, but that it’s the root of our economic recession."
Redistributive, collectivist policies have consequences. The young are noticing, as these writers demonstrate, and their departure is a way for them to avoid being the victims of wealth transfers.
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