MARCH 10, 2023 – Today brought unsettling economic news, including the gathering storm clouds around “X Date”—the date when absent legislation increasing the debt ceiling, the federal government runs out of dough to pay its obligations as they come due. By consensus among economists of all stripes, the consequences of Congress not raising the federal debt ceiling are potentially catastrophic, yet certain members of Congress value more the dubious celebrity of running around with dynamite than they do to understanding the suicidal blasting power of the explosive.
This morning on C-Span I listened for an hour to Fed Chairman J. Powell’s testimony yesterday before the House Committee on Financial Services. I’ve followed Powell off and on since his appointment to his current role as first among equals within the group of seven Fed governors, and find him smart, experienced, empirically focused and most important, level headed and politic—all essential attributes for a Fed chair and every Fed governor, yet no guarantee that the Fed will “get things right.”
But the Fed’s role is limited strictly to monetary policy, with fiscal policy left to the legislative branch and implementation of policy relegated to the executive. Because of the lag between Fed actions and their effects, monetary policy is an inexact way to navigate between inflation and recession. It’s a bit like steering a rudderless ship past Scylla and Charybdis solely by working the vessel’s propulsion systems. The good news, however, is that the folks on the bridge aren’t a bunch of amateurs, politicians or amateur politicians.
That leaves the two-sided coin—taxes and spending—of fiscal policy with members of Congress, very few of whom you’d want on the bridge of monetary policy—or, in a perfect world, in the cockpit of fiscal policy itself. Ultimately, fiscal policy is a reflection of the influence of lobbyists and citizens who are likely to vote in the next election. The monied influencers rarely have the greater good in mind, and too many people who actually vote don’t know or care much about fiscal policy from a macroeconomic viewpoint.
At yesterday’s hearing, similar to most Congressional hearings, the main feature was grand-standing for the benefit of likely voters and campaign contributors. Committee members read prepared statements and asked loaded questions to score points with constituents and campaign check-writers. Both Dems and Reps wore their partisanship on their sleeves—and probably their Twitter feeds. Powell managed to maintain a straight, respectful face no matter how dumb the questions.
A larger point missed by most Republicans and a fair share of Democrats, is that to evaluate any one number, a person needs at least—at the very least—one other figure. In the minds of many, the sole focus is on the current whopping size of the federal debt. But what’s “whopping”? Relative to what: The current rate of inflation? Twelve month trend in inflation? Core? Non-core? Current GDP? GDP 10 years ago? Projected GDP? What’s the relationship between the deficit as a percentage of GDP and market yields on government debt issues? Et cetera ad nauseam.
Furthermore, what’s the relationship between deficit spending and inflation in the context of global supply chain disruptions, over-reliance on fossil fuels and chronic labor shortages?
To the extent fiscal policy and inflation are related, a dollar of expenditure in one area is not equal to a dollar spent elsewhere. Social security and Medicare expenditures, for example, are merely transfer payments—to the extent payroll taxes equal or exceed payments. A dollar spent on farm subsidies, meanwhile, might not have as much overall value to the economy as a dollar invested in a new high-traffic bridge or high-speed internet access for an economically depressed rural community. And so on.
But none of this finds much discussion among voters or politicians vying for their support. What’s more likely to be proffered and consumed is a red meat line such as, “You can’t run your checkbook like the leftwing, extremist Democrat government runs its fiscal house!” Except . . . the personal checkbook-to-government analogy isn’t apt. To explain why not takes more than a 45-second, negative TV campaign ad.
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© 2023 by Eric Nilsson
