Once the Republican National Convention in Tampa Bay, Florida ends, all eyes will turn to this year’s Federal Reserve conference in Jackson Hole, Wyoming. At the 2010 conference, Chairman Ben Bernanke gave a speech that paved the way for a second round of quantitative easing, and this year’s speech will be closely watched for hints that the Fed is about to ease policy further in an attempt to help the economy recover.
Discussion in the minutes from the last monetary policy meeting points in the direction of further easing, and most analysts expect Chairman Bernanke will set the stage for further action. I hope they are correct. The unemployment rate is still far too high, there’s no sign that more aggressive policy would cause inflation to become a problem, and the economy can use all the help it can get. Given the slow pace of the recovery, it’s puzzling why the Fed hasn’t done more to help already.
But I also worry that monetary policy has been oversold. It cannot, by itself, cure the economy’s problems when the downturn is as large as the one we have experienced. In severe recessions, fiscal policy is also needed.
Presently, there are two ways that fiscal policy could be used to promote a faster recovery. The first is infrastructure spending. We cannot afford to fall behind the rest of the world in terms of our infrastructure development, but that’s exactly what we are doing. At a time when interest rates are as low as we are likely to see, when labor and other costs are minimal due to lack of demand during the downturn, and when the need is so high, why aren’t we making a massive investment in infrastructure, which is ultimately an investment in our future? There are many, many public investments we could make where the benefits surely exceed the costs – these are things the private sector won’t do on its own even though they are highly valuable to society – so what are we waiting for?
The second thing that is needed is debt relief for households. Losses in home equity, stock investments, and job opportunities have taken a significant toll on household balance sheets. As households attempt to rebuild what has been lost, they save more and consume less and the loss of consumption is a drag on the recovery. So long as this rebuilding continues, and it can take many years to rebuild after such large losses, the economy will continue to be sluggish. Debt relief, or anything else the government can do to help households overcome their losses, would shorten the recovery.
We have used both monetary and fiscal policy to battle this recession and without the Fed’s actions to limit the downturn things would have been much worse. Fiscal policy in the form of the stimulus package, though too little, too late, and too tilted towards tax cuts, also helped to limit the damage to the economy. But when it comes to promoting a faster recovery, both monetary and fiscal policymakers have failed to do enough to help the economy return to full employment.
Which brings us back to the Republican National Convention. The economy will be the focus at the convention, and we will hear about the supposed failures of the Fed. For example, one of the biggest applause lines at Ron Paul’s rally in Tampa on Sunday was that “Ben Bernanke is a traitor and dictator,” and Mitt Romney has said he will replace Bernanke, presumably with someone anxious to undo the policies the Fed has put into place rather than expand upon them to promote recovery.
We will also hear claims that, despite growing evidence to the contrary, the fiscal stimulus didn’t work. Criticism about the government debt will surely follow, and it will be clear that there’s no room in Republican plans for infrastructure or debt relief programs to speed the recovery.
If there’s any policy Republicans ought to be able to support, it’s infrastructure spending. It’s inherently a supply-side policy, it helps to promote future economic growth, and it’s an investment with large, positive net benefits. But Republicans see a “we won’t build that” approach to infrastructure spending, an approach that is harmful to our prospects for recovery and to our prospects for future economic growth, as a way to reclaim the presidency.
Romney continues to use the “you didn’t build that” quote – misleadingly – to try to argue that Obama is against business, and that this is one of the key factors holding back the recovery. But the real problem has nothing to do with Obama’s view of business. The real problem is the Republicans’ opposition to using monetary or fiscal policy to help the economy in any way, and their “we won’t build that” stance on infrastructure spending is a good example of the extent to which their political aspirations stand in the way of a speedier recovery.