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.