President George W. Bush is considering a “stimulus package” to
ward off a recession. He seems to be looking in the wrong places.
The problem we face is less fiscal than it is monetary. But his
administration and the Federal Reserve have bollixed up monetary
management so far, and seem intent on continuing to do so.
News reports say that Bush is considering a set of targeted tax
cuts. What that appears to amount to is to find more special
interests to stimulate. More use of the tax code to assist favored
industries or to somehow try to massage the economy. Perhaps even
some targeted spending hikes.
This is madness. The Bush administration already has presided
over astronomical, record deficits. A huge chunk of those deficits
could have been avoided if the president had fought against
spending hikes for the first six years of his administration.
Instead, he pushed big spending with a passion not seen in any
Republican president since Richard Nixon.
Bush’s economic record does, of course, deserve serious praise
for his tax-cutting prowess. (And if Congress really wanted to do
something to improve the economic outlook, it would make those tax
cuts permanent.) But monkeying around with obscure corners of the
tax code, as Bush is considering now, won’t do much of anything to
cure what ails the economy in 2008.
The problems with the economy lie not in the tax code but in two
areas: Policy choices, especially on energy; and monetary
management.
THE TWO MOST recent energy bills have been disastrous. The ethanol
mandates in the first bill caused supply dislocations at
already-overburdened refineries. They also drove up the price of
corn, which therefore pushed up the price of food in all sorts of
deleterious ways. The energy bill passed just this winter will only
make things worse.
The last two farm bills also have been disasters, causing
massive disruptions of free-market economies and boosting prices.
And, unfortunately, there is no political way for the
administration to fix those policy problems in the short term.
What remains is monetary policy. The administration has,
sometimes overtly and sometimes tacitly, encouraged a drastic
weakening of the dollar for at least four years. The Federal
Reserve Board, meanwhile, has consistently missed its targets when
trying to micromanage interest rates, first going too low for too
long (encouraging low savings and a housing bubble) and then going
too high for too long (making the bubble burst rather than just
slowly dissipate).
With the administration’s assistance and encouragement, the Fed
could do a world of good right now by taking two actions. First, it
could stop trying to micromanage interest rates and instead let the
rates “float.” In other words, let the market determine them. Odds
are that rates would fall in the short term, which would restore
confidence in capital markets.
Second, both the Fed and the administration could announce a
long-term bias in favor of restoring the strength of the dollar at
least to a happy medium. Even if the dollar was too high for too
long around the turn of the millennium, it now clearly has fallen
too far, too fast, and must be boosted.
A dollar loosely pegged to a basket of commodities, including
gold, would restore confidence in long-term investments while
discouraging inflation. And it would provide far more stability,
and thus predictability, than has the yo-yo nature of the
Greenspan/Bernanke micromanagement of interest rates.
THE COMBINATION OF an immediate “float” of interest rates with an
announcement of a long-term bias towards dollar restoration would
be good both for economic fundamentals and for market
psychology. Oddly enough, the latter is itself a key fundamental of
the nation’s economy. Much of economic activity is based on
confidence (or the lack thereof), expectations, and mood.
Granted, market actors are smart enough over time to base their
expectations (and their moods) on actual data concerning actual
economic occurrences. But in the short run, millions of decisions
are made every day that are based on nothing more than
semi-educated hunches — hunches that themselves cause and create
economic activity in real, measurable, palpable ways. (In some
economic ways, the wish is indeed father to the thought, and the
thought the father to the actual result.)
The reason the combination of an interest rate float and a
long-term, public commitment to a strong dollar will help
psychology is that it will reassure investors of two sorts. Those
investors most concerned with being able to bail out of current
difficulties will be delighted with the lower rates that will
likely ensue in the short-term. But inflation hawks who care more
about price stability will be delighted with the longer-term
promise of a strong dollar.
For that matter, a presidential candidate who starts publicly
banging the drums for a strong-dollar policy probably would get a
big political boost. Most of the public won’t really understand the
monetary policy involved; but if you ask ten people on the street
whether or not they support a strong dollar, I would bet that at
least eight would provide not just an assent, but an almost
visceral reaction in favor.
Meanwhile, if a candidate or President Bush wants to do
something serious to reform corporate taxes, the real answer was
provided by George Will in a column the other day: Eliminate
corporate income taxes entirely. (More on that in another
column.)
Instead, the Bush administration seems intent on Nixonesque
attempts to use fiscal policy to somehow, some way push off a
recession until after this Fall’s elections. Not only will its
efforts amount merely to an attempt to dump the problems into its
successor’s lap, but it will almost assuredly be an attempt in
vain. Stagflation could make its ugly face obvious as early as this
summer.
And nothing, nothing at all, would do more to assure an Obama or
Clinton victory in the Fall, with horribly liberal policies on
economics, defense, and judges sure to follow.
