we're all Keynesians-- again?!
From the editorialists at the WSJ, more on the Bush/Congress rumblings about "economic stimuli"-- and Bernanke's fumble in front of Congress-- a topic of recent blogging activity with more to come: not a good sign...
So famously declared Richard Nixon back in 1971, in what we thought was a different economic era. But after yesterday, we're not sure what decade we're in. With Federal Reserve Chairman Ben Bernanke and President Bush both endorsing temporary tax cuts and more federal spending as "fiscal stimulus," an inflation-adjusted version of Jimmy Carter's $50 rebate can't be far behind.
Appearing before Congress, Mr. Bernanke told Democrats what he thought they wanted to hear. The former academic economist blessed a "fiscal stimulus package," as long as it is "explicitly temporary." How new federal spending can be "temporary," he didn't say, as if a dollar collected in taxes or borrowed and then spent can be recalled.
The "temporary" line was thus a dagger aimed directly at the heart of Mr. Bush's desire to make his tax cuts permanent. The Fed chief did aver that, "Again, I'm not taking a view one way or the other on the desirability of those long-term tax cuts being made permanent." But of course refusing to endorse something is itself a point of view -- a point Democrats were already joyfully repeating yesterday.
Instead, Mr. Bernanke embraced the explicit Keynesian notion that the government should write checks to "low and moderate income people," who will spend it quickly and thus lift consumer demand. In the academic literature, this is called having a higher "marginal propensity to consume" than the more affluent, who tend to save more.
We're all for putting more money in the hands of the poor and moderate earners, especially via stronger economic growth that will give them better paying jobs. But the $250 or $500 one-time rebate check they may now receive has to come from somewhere. The feds will pay for it either by taxing or borrowing from someone else, and those people will have that much less to spend or invest themselves. We are thus supposed to believe it is "stimulating" to take money from one pocket and hand it to another....
No wonder stocks sold off yesterday after Mr. Bernanke endorsed this 1970s' economic show.
A fiscal stimulus that really stimulates would change incentives, and do so permanently so workers and investors can know what to expect and take risks accordingly. One problem with the increasingly "temporary" nature of the Bush tax cuts is that they are beginning to introduce new political risk into economic decisions. Though they expire in 2010, everyone understands that a new President and Congress could act to raise taxes as soon as next year. Mr. Bernanke could have educated the public about this business expectations problem, but then Democrats would have been upset....
Mr. Bernanke can expect to get pressure no matter what he does, and perhaps he figured the way to get more monetary running room was to give Congress what it wants on spending. If so, it doesn't inspire much trust in us that he can hold fast on monetary policy either. And speaking of the 1970s, what markets may really fear is that we are entering another period of "stagflation," slower growth with rising prices, and without political or economic leaders who understand what to do about it.
One truth that Mr. Bernanke did speak yesterday is that it is a mistake to rely on monetary policy alone to spur economic growth. It's a shame, then, that his testimony makes it that much less likely that we'll get any genuine "stimulus" from fiscal policy.