Category Archives: exit strategy

How to Get the Economy Back on Track

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Harvard Economist, Martin Feldstein, has an Op Ed column in yesterday’s New York Times, “Saving The Fed From Itself”, which gets our current economic situation half right.  First of all, Mr. Feldstein says that the Fed’s quantitative easing policy is inadequate because “the magnitude of the effect has been too small to raise economic growth to a healthy rate.  … The net result is that the economy has been growing at an annual rate of less than 2 percent.  … Weak growth has also meant weak employment gains.  … Total private sector employment is actually less than it was six years ago.  … While doing little to stimulate the economy, the Fed’s policy of low long-term interest rates has caused individuals and institutions to take excessive risks that could destabilize the economy just as it did before the 2007-2009 recession.”  So far he’s right on the button!
But then he goes on to say, “To get the economy back on track,” Congress should enact a five year plan to spend a trillion dollars or more on infrastructure improvement and that this would “move the growth of gross domestic product to above three percent a year.”  An artificial stimulus like this might work temporarily but then it ends and we’re back where we started.  We need a self-generating stimulus that will keep going indefinitely on its own.  How do we accomplish this?
The answer should be obvious.  We do it by stimulating the private sector to take more risk in order to generate more profits. In the process they will hire more employees and boost the economy.
How do we motivate the private sector?  By lowering tax rates and loosening the regulations which stifle growth.  Closing tax loopholes and lowering deductions (which will raise revenue to offset the lower tax rates) has the added benefit of attacking the corporate cronyism which everyone deplores.
We really do need to put first things first.  If we can jump start the economy by motivating the private sector to invest and grow, we will have more tax revenue to spend on new and expanded government programs as well as shrinking the federal deficit.
Why is this so hard for so many people to understand?

Get Out While the Getting Is Good!

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David Malpass, president of Encima Global LLC, has an op-ed in yesterday’s Wall Street Journal, “The Economy Is Showing Signs of Life”, pointing out that business loans, auto sales and hourly earnings are up.  Mr. Malpass says that “The sequester is a bad way to set spending priorities, but it reduces the risk of future tax increases, contributing to the upturn in consumer and business confidence. … The good news is that an end to the latest version of the Fed’s quantitative easing would create space for more growth in private credit and a shift back toward market, not government allocation of credit. …Because America’s private economy is the world’s biggest net creditor and capital allocator, the United States will be the biggest beneficiary of a return to market based interest rates, with vast potential in efficiency, intellectual property and the capacity to innovate.”
Federal Reserve Chairman, Ben Bernanke, is given much credit for the fact that the Great Recession did not turn into another depression.  But now, four years after the end of the recession, we have the twin problems of a slow growth economy, which keeps the unemployment rate much too high, and the potential for huge inflation caused by the vast increase in the money supply.  Mr. Malpass makes an excellent argument that the economy has recovered enough so that further quantitative easing will now retard future growth.  It clearly also increases the chance of runaway inflation.
Current artificially low interest rates also disguise the future damage now being created by huge federal deficit spending.  When interest rates go back up, as they inevitably will, interest payments on our rapidly increasing national debt will also increase dramatically, and force far greater cuts in federal spending than are currently being caused by the sequester.
In other words, to speed up economic growth, curtail the risk of future inflation and to put more pressure on Congress to control federal spending, the Federal Reserve should begin to exit from quantitative easing in the very near future!