Published in The Tennessean, Sunday, November 14, 2010
Burdensome regulations slow economic recovery
Richard J. Grant
It is unfortunate that the Federal Reserve Act gives the Federal Reserve System three different goals to promote: maximum employment, stable prices, and moderate long-term interest rates. Riding three horses at the same time can be dangerous.
Fed Chairman Ben Bernanke simplifies matters somewhat by referring to the Fed's “dual mandate” to promote “a high level of employment and low, stable inflation.” But he is not shy about manipulating interest rates in his attempt to achieve the other two goals. With price inflation low and unemployment high, the Fed has attempted to raise employment by pushing down real interest rates.
This is why the base money supply has increased so drastically since mid-2008 and why prices did not fall more than they did at that time. Chairman Bernanke still believes that the inflation rate is too low and that more inflation can help increase employment.
The trouble is that the Fed does not really have the ability to maintain high levels of employment. Whenever it tries to do this, it just sets us up for the next boom-bust cycle. Its discretionary interventions are best described as disruptive and serve to reduce long-term employment.
Big increases in unemployment, such as we have now, are common symptoms of government-induced boom-bust cycles. But the president and Congress have made matters worse in their attempts to treat these symptoms.
Rather than let the market correct the mal-investments that were encouraged by government incentives, the president and Congress have slowed the recovery process by commandeering resources from the private sector while piling on more burdensome regulations.
Recovery and reemployment are overdue and will be slower than necessary as long as the administration prevents the new Congress from reducing the size and obtrusiveness of government. The president will likely agree to stop tax rates from rising in January, but he is unlikely to acquiesce in the repeal of his cherished, but destructive, health-care and financial regulation laws.
Nothing that the Federal Reserve can do will overcome the job-destroying effects of the administration's heavy handed fiscal and regulatory interventions. The so-called “stimulus” program served only to squander time and resources. Attempts to prop up home prices and failing businesses have delayed necessary adjustments. Attempts to regulate everything from credit to carbon dioxide have created an atmosphere of regime-uncertainty in business and the wider society.
Businesses have streamlined their operations to maintain profitability and to ensure their survival. They will be reluctant to hire new workers until they can see more clearly what the likely costs of future taxes and regulations will be.
These fiscal and regulatory burdens were not imposed by the Fed. But in its attempt to overcome their effects and to boost employment, the Fed risks failure to maintain low inflation and moderate interest rates.
The Fed's previous manipulations of interest rates have induced the booms and precipitated the busts that panicked the government to react with stimulus packages and other ill-conceived interventions. It does not help us that the Fed, in turn, is now reacting to the government's policies with its own ill-conceived inflation of the money supply.
While producer prices are rising rapidly at home, the dollar is falling against currencies around the world. Perhaps it is time to reduce the Fed's discretion and look to a commodity price standard. We could, once again, link the dollar to gold.
Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: firstname.lastname@example.org
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