AP Photo/Manuel Balce Ceneta, File
This is an expanded version of a piece that first ran on Huffington Post.
There has been obsessive chatter about whether the Federal Reserve will, or should, raise interest rates this fall. At the Fed's annual end-of-summer gabfest at Jackson Hole, Wyoming, the issue was topic A.
Advocates of a rate hike make the following claims:
Very low rates were necessary when the economy was deep in recession. Now, with growth up and unemployment down, the near-zero rates are creating speculative bubbles. They are not really stimulating the economy much, as corporations put cash into stock buybacks and bankers park spare money at the Fed itself. So let's get on with a more normal borrowing rate.
Opponents of a rate hike counter that the economy is a lot weaker than it looks. Wages are going nowhere. A lot of the jobs that have pushed down the nominal employment rate are lousy jobs. China's economy has just hit a big wall, which will slow down global growth.
Raising rates will increase consumer and business costs across the economy-everything from home mortgages to credit cards to construction loans. There will come a time to raise rates, but we are not there yet. If anything, the Fed should find new ways to get money out into the real economy.
The Fed is famous for raising rates prematurely, seeing ghosts of inflation. But there is no inflation on the horizon-the bigger worry is deflation. In fact, the inflation rate is well below the Fed's own target of 2 percent. And the Fed is the only game in town.
On balance, I think the opponents of a rate hike have the better argument. But consider for a moment that last assumption-that the Fed's interest rate policy is the only game in town.
The larger issue, which is getting submerged in the great debate about raising rates, is that monetary policy should not be the only game in town.
Normally, in a soft economy, the government would be using fiscal as well as monetary policy. But because of the obsession with deficit reduction-unfortunately shared by the Obama administration (remember the Bowles-Simpson Commission?)-fiscal stimulus today is off the table; worse, deficit-reduction is contractionary. In plain English, prolonged deficit-cutting slows down growth.
With fiscal stimulus ruled out politically, pressure is on the Fed to be the sole engine of growth. Yet the central bank can only do so much.
There really should be three engines of government growth policy-monetary policy, fiscal policy, and long-term public investment. Conventionally, there are two-monetary policy which is set by the Fed, and fiscal policy via which government uses deficits or surpluses to stimulate growth or restrain an overheated economy.
When the administration was promoting its stimulus in 2008, it used the language of counter-cyclical fiscal policy-let's temporarily run a bigger deficit to make up for the shortfall in private purchasing power in a deep recession. Just to reassure critics, the administration spoke alliteratively of a stimulus that would be "timely, targeted, and temporary." God forbid we should speak of a permanent increase in public investment.
But of course, that's exactly what we do need, and the need is not temporary. The United States has a shortfall of deferred maintenance and modernization of basic public infrastructure, estimated by the American Society of Civil Engineers at about $3.6 trillion.
We also need to invest in 21st infrastructure-everything from high-speed rail to smart grid electricity systems to serious investment in green transition and mitigation of sea-level rise.
Half a trillion dollars a year over ten years would be the right scale. That would improve the economy's productivity, create good domestic goods, and produce a sustained recovery.
But it's wrong to think of serious public investment merely as counter-cyclical fiscal policy-we need it for its own sake.
Large-scale public investment would take some pressure off interest rate policy to be the only engine of government growth policy. And here is where the Fed could make an unconditional difference, if it had bolder leadership.
In the pit of the recent recession the Fed and the Treasury bent the rules and invented new rules to buy sketchy securities from banks and from other purveyors of speculative bonds. The Fed extended a total of $16 trillion in loans to banks, and bought another $3.5 trillion in government and mortgage-backed bonds.
If the value of the privately issued bonds had been left to the vagaries of private money markets, they would have been next to worthless, leaving the big banks even further in the red. In effect, the very players who had caused the crisis were made whole via unorthodox Fed policy.
At the time, a number of critics such as Joseph Stiglitz, William Greider, Rob Johnson, James Galbraith, Jane D'Arista and Tim Canova, serving as an advisory committee to Bernie Sanders on reform of the Fed, suggested that if the Fed could buy bonds underwritten by banks it could also purchase infrastructure bonds. This would pump money into the economy directly, and not via banks.
A couple of Fed governors did take the proposal seriously enough to explore its feasibility. But they quickly realized that it had no political support among the other governors.
That's a pity. By supporting infrastructure directly, the Fed could put money where it's needed, get the economy started on a program to retool our badly out of date public spaces, and take the pressure off interest rates. Sanders has continued to press for this approach, and supports it in his presidential campaign.
It's good that critics are countering the absurd idea that now is the time to raise interest rates. But monetary policy is not the only possible game in town, and we need a much broader set of policies and a broader debate.
