Monday, November 9, 2015

Monetary Tightening is the Wrong Trade-off

Sometimes when I insist that monetary conditions are still too tight, I feel as if I am raining on everyone's parade. What monetary tightening? After all, the official word - from the Fed - is that the economy is doing reasonably well. Supposedly, nothing is "broken" any longer, since the financial system was rescued. Just the same, the drumbeat for further fiscal stimulus remains in the background.

But underlying economic factors which contributed to the Great Recession have yet to be addressed, and fiscal stimulus cannot play a leading role as a driver of future growth. Fiscal policies originate from preexisting wealth formation, a fact which has been obscured by increased governmental activity in the economy. One caveat: there's a notable exception for fiscal stimulus benefit in recent history, which may explain why some believe government could still contribute to growth. Before it took on the weight of entitlements and massive redistribution, Washington was able to assist in the creation of valuable infrastructure, in the earlier part of the twentieth century.

Those infrastructure gains - especially electrification and transportation - did much to reinvigorate an economic growth trajectory which had yet to complete its shift from agricultural employment. Before massive consolidation and centralization took place in the latter twentieth century, growth in commerce and related activity had taken hold at local levels, even in the far corners where new highways were built.

During that time, economic participation experienced a dramatic rise in ways that were broadly distributed - especially in the South. The government assistance of that time frame, doubtless contributes to the mistaken belief that Washington could still contribute to growth potential...if only it really wanted to.

However, Washington scored a win for the twentieth century economy, because these forms of infrastructure made everyone more productive. Today, governments and special interests more often seek greater productivity in the form of wealth capture from a select few, instead of populations as a whole. For non tradable sectors, that translates into an insufficient amount of product, in contrast with what is actually demanded. (This can be confusing, if and when recession is associated with too much product in tradables sectors.) As a result, too many discussions regarding growth either fall into the camp of what government could potentially do, or else reasoning that further growth is not even necessary.

Marcus Nunes also reminded everyone in a recent post, that circumstance are not quite as rosy as they may seem. Both the Fed and Ben Bernanke continue to perpetuate the myth that nothing was lost from the Great Recession, and that bailing out banks was all anyone needed. Every time I see the 2012 Atlantic article cover of Bernanke, I recall the Time magazine cover when he was named person of the year in December 2009. Even prior to becoming a regular reader of Scott Sumner's blog, I remember feeling a bit dubious about the honor he received for that earlier award.

By refusing to acknowledge the importance of a level spending target, the Fed is implicitly unwilling to admit it is still engaged in monetary tightening. Likewise, the Fed hasn't acknowledged what has become a trade-off, between full monetary representation versus the continued support of financial sectors. For one, governments have yet to adjust twentieth century consumption models to the changing realities of the 21st century. Even as populations continue preparing for knowledge use roles, today's institutions have little room for the services production capacity which populations seek.

In particular, people need new production roles in order to maintain long term growth levels. Instead, production capacity is being defined in terms which diminish both marketplace output and income aggregates. There's a simple way to think about what has occurred. Since hard restraints exist in basic production such as housing and services, opposing viewpoints believe the only way to "win" is by forcing one's opponents to lose.

The result is a diminished workplace and marketplace: the real economy equivalent of monetary tightening. Too much knowledge is now used for smoke screens and obfuscation, instead of broad economic participation. Bernanke and company claimed victory after the Great Recession, due to the fact that the financial system was saved. Even so, saving the banks should not have been the end of the story. It should have been the beginning point for a more productive response - in both monetary and real terms.

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