The Recession and Pushing on a
String
By
Richard W.
Crockett
There is much consensus that we are
in a recession, but there are few ideas about how to get out of it, other than
to simply wait it out, and that is not a good idea. The lack of certainty that we are in one will last only
until we have compiled data for two consecutive quarters on economic growth and
if it is negative, we will then know.
The Federal Reserve has a plan to fight recession that involves driving
down interest rates in order to ease credit markets in the hopes that banks
will regain their courage and allow borrowers who need money to borrow and then
presumably spend. This is a kind
of trickle down approach. The cost
of money goes down for banks and other lenders, and it is hopefully passed on
to borrowers who can then afford to finance purchases. These purchases tend to
stimulate the economy, again hopefully, out of recession. There is always a cost to this strategy
when done with a vengeance, as the Fed seems to be doing. The cost is a cheapening of the dollar
in foreign exchange, and this means that we in the United States will have to
pay more for imported goods. The dollar could even lose it status as the
ÒworkingÓ currency in world markets, which could create new and greater problems,
which are beyond the scope of this discussion. As it is, things could start to
look more expensive at Wal-Mart and other retail stores who traffic in imported
goods. This cheapening of the dollar comes not from interest rates per se,
but the increase in the money supply that this policy produces. According to market theory, if there is
more of a thing, even in the case of dollars, it has less value because its
abundance tends toward a saturating of demand. In short the policy is
inflationary. This is apt to hurt
the pocketbooks of persons on fixed incomes such as retirees. Persons who have little or no
discretionary income will feel this because wages are not likely to go up in a
recession. The injury seems to get
to the little people first, but the benefits seem to get to them last.
Part of the FedÕs motivation in
lowering interest rates is the housing crunch, especially in Òsub-primeÓ
mortgages. For the last few years
as jobs have gone overseas, the American consumer has substituted equity for
income. If we are not earning
enough in our new lower paying jobs, following a plant closure, simply tap into
home equity. So we refinance our
home at a teaser rate, sign the adjustable rate mortgage and voila, we
have money to meet expenses with.
But this is a strategy that is bound to run out of gas. Many people are
ÒmaxÕd outÓ in their mortgages, and while housing
construction has been one engine of growth, in the absence of manufacturing, it
has created a glut in the national housing market and eventually contributed to
a decline in real estate values.
Now borrowers are Òupside downÓ in their mortgages. This means that they owe more than the
mortgaged property is worth. Large
institutions the size of a Wells Fargo or a Bank of America have banks around
most of the country, and this ÒnationalizationÓ of banking tends to nationalize
banking skittishness about the mortgage business. All feel it, even though the local market may be OK. The FedÕs aim at lowering interest
rates is to help the borrower with an adjustable rate mortgage, among other
things. But paradoxically,
sometimes it hurts. Some mortgages
are tied to short-term securities, which actually rise when the Fed lowers
rates.
While the Federal Reserve was
created precisely to do what it is doing, that is to manage trends in the
economy at the national level, it is more effective at slowing down an
over-heated economy than stimulating a sluggish one. The most descriptive metaphor that I know of to illustrate
this idea is that of Òpushing on a string.Ó One may be able to pull an object with a string, but it is
impossible to push an object with a string. That is the essence Fed policy in the present instance and
of supply-side theory. Pushing on a string. What is the alternative? The answer lies in choosing sides in an old argument between
economic ÒliberalsÓ and economic ÒconservativesÓ or at least between points of
view which have been, correctly or incorrectly, labeled that way.
The answer lies in budgetary fiscal
policy. Now plug your ears and
close your eyes before you peek because this is going to be painful. We need to stimulate the economy by
(ouch) governmental spending on domestic programs and infrastructure. This is
inflationary, too, but the virtue of it is that it is targeted. This will mean running deficits for a
time. Now you may say, ÒFor crying
out loud, we are already running deficits, you idiot!Ó True enough, but for the wrong
purposes. What we are blowing
money on seems to have very little domestic multiplier or in other words, very
little domestic economic effect. I am talking especially about the war in Iraq.
And since we have shipped our manufacturing capacity to China and other Third
World countries, it is more difficult to Òprime the pumpÓ through the stimulation
of manufacturing. We need to
resort to those things that are purely domestic, if such things can be
found. There are some, though, and
we need to notice what they are. A substantial public works program in the
fashion of RooseveltÕs New Deal wonÕt do it by itself, but it will help, and we
need the infrastructure repair.
This kind of expenditure is in a very high percentage spent with
domestic contractors. A health
care program that eliminates the uninsured status of an additional 47,500,000
people would help. That is
domestic spending, and it is long term and sustaining, not merely a short-term
fix the effect of which will quickly dissipate. We could also put some money
into education, including incentives to attract the smartest people into the
teaching profession. They all
donÕt need to be medical doctors, astronauts or corporate CEOÕs. This
investment in the countryÕs future will pay dividends. We also could through governmental
funding help the development of ÒgreenÓ projects, including ÒgreenerÓ modes of
transportation and shipping. How about testing and developing train locomotive
style engineering on highway trucks, which pulling 80,000 pounds now make about
3 miles per gallon, making them primarily electric and using diesel only to generate
electricity and run the electric motor, cutting back on the amount of diesel
used significantly. This is a different design than a conventional ÒhybridÓ
vehicle. Do you think this could
have an impact upon the price of fuel, diesel in particular, which is currently
over $4.25 per gallon in some instances? It could also impact the price of
heating oil and gasoline. At this price it costs more than a thousand dollars
to refill the tanks on an eighteen-wheeler. Further, any funding of research and manufacture of green
projects should include the requirement that they be manufactured and
produced here.
There is some additional government
employment which could help, such as adding to the ranks of the INS and border
patrol, not for the purpose of badgering Mexican immigrants, but for securing
and regulating the flow across the border so that we know who is here. We also
need a serious upgrade in INS and other governmental technology. The point is that these are
domestic jobs and domestic expenditures.
While this is government activity, it is now necessary to do this since
we have allowed the private sector to desert us by removing a major engine of
the economy to overseas, the manufacturing sector of the economy. These guys (the private sector) are not
going to bail us out. We need to
do it ourselves, and by that I mean our Òcollective selves.Ó To steal from Ben Franklin and put it
in economic terms, through governmental endeavor, we need to Òhang togetherÓ or
through and excess of individualism, Òwe will hang separately.Ó
04/03/08