Reich: The Fed can't do it all

Robert Reich

BOB MOON: We continue today with our breakdown coverage, our economy one step at a time. Here's a prediction for you: On Friday, you'll be hearing a lot about Jackson Hole, Wyo. That's the site of the annual Federal Reserve retreat. Last year, central bank boss Ben Bernanke announced at the event that the Fed would take a more active role in spurring the economic recovery. And a few months later, it began another round of buying U.S. government bonds. So, what's on tap for this year?

Commentator Robert Reich says the answer might not make a difference.

ROBERT REICH: We're perilously close to a global recession. The U.S. economy is hardly growing at all. Europe's strongest economy -- Germany -- is almost dead in the water, and the rest of Europe is a basket case. The Japanese economy is barely functioning. And what had been the fastest-growing big economy in the world -- China -- is furiously pulling in the reins, to avoid inflation.

As a result of all of this, global demand is shrinking.

Many are hoping monetary policy will come to the rescue. That's why there's so much interest in Fed Chairman Ben Bernanke's speech this Friday at the Fed's annual gab fest in Jackson Hole, Wyo.

Bernanke may signal the Fed's willingness to embark on another round of so-called quantitative easing -- designed to bring down long-term interest rates by buying assets of longer maturity.

Some also hope the European Central Bank will lower interest rates there -- or at least delay the next increase.

All of this, however, is wishful thinking. The Fed is deeply split about further easing, as is Europe's central bank.

In any event, more expansive monetary policies are unlikely to do much good on their own. When demand is slowing so dramatically and unemployment is already high, expanding the money supply is like pushing on a wet noodle. Nothing happens.

Even at very low interest rates, companies won't borrow to expand and hire more workers if they doubt they'll have more customers for what they produce. And consumers won't borrow to spend more on goods and services if they're worried they won't have jobs or their wages will continue to fall.

To have any effect then, monetary easing has to be accompanied by expansionary fiscal policies that spur demand.

The problem is, in Europe as in the United States, politicians are now practicing fiscal austerity -- cutting public budgets, at the very time consumers and the private sector are cutting private budgets.

Yes, long-term public debts do have to be brought down. But austerity right now is the wrong medicine at the wrong time.

MOON: Robert Reich was Secretary of Labor for President Clinton. His most recent book is called Aftershock: The Next Economy and America's Future. Our future includes David Frum in this space next week. Til then...tell us what you think. Go to Marketplace.org and click on this contact link.

About the author

Robert Reich is chancellor's professor of public policy at the University of California, Berkeley. He has served in three national administrations, most recently as secretary of labor under President Bill Clinton.
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trolls please explain to us how cutting spending will actually help the current circumstances?
~~Random Mitchell~

Gah chew covered! *Cutting Spending* is the best thing since sliced bread. Listen up, Animals, here is how it works :

Government simply stops electronic food stamps. Simply stops bailout of billionaire bank top management. Stops hedge-fund-manager bailouts. Stops you combat-pay. Got it? With less money coming in, vendors go into panic mode and drop prices. Prices around the World go into free-fall. Service stations across the street from each other go into gas-war-mode, race to the bottom. As they both drop retail to one cent more than wholesale, wholesaler drops his prices even further. Bottoms on everything drop as low as Fed Funds Target. Suddenly the money in your pocket seems to buy everything at once. Everyone and his neighbour storm-troops into W*Mart. The overflow from W*M spills over into T*M and B*J and yes even into Mom&Pop*Mart. Ned Flanders is so busy selling his left-handed things that he hires up all the Unemployed Teens in Tenley Town. Everyone is busy working 9 jobs and spending like gangbusters. As inventories shrink thus prices finally start to recover, people go nuts trying to grab that last shot at lower prices before it is too late.


Will one of you trolls please explain to us how cutting spending will actually help the current circumstances? Everyone knows we have to cut longterm, but at least Reich's proposals have some logic behind them.
The government is NOT competing with the private market for money. They have cash reserves as far as the eye can see. If anything, it is giving them a place to invest with no risk.
Taxes are NOT limiting investment. They are at their lowest point in 50 years and we still have ridiculous unemployment. Besides, taxes are paid on profits (if that) and not on gross income. Taxes don't make it tougher to be profitable, just lower the actual profit by a small amount.
The debt is NOT suddenly scaring investors any more than it did in 2006 or 2005 or 2004. We had a ridiculous amount of debt then as well, but as a wise man said, "Deficits don't matter." If it's BS now, it should have been BS then as well.

So if we cut spending and decrease demand for products, please explain how this will suddenly cause companies to hire people to build or sell products to a marketplace with even more unemployed workers than we have now?

(BTW, Bob may not have been advocating for lower spending, with the exception of Defense, but he DID advocate for paying the bills as they came in through higher revenue and more balance. As I recall, that balanced budget passed without a single Republican vote. Thanks, Bob!)

"But austerity right now is the wrong medicine at the wrong time."
So when is the right time? Should the economy start warming up, and someone starts talking austerity, I bet you'll be back on the radio talking about how removing the money will cause another down turn. If the economy was really hot you'd talk about how much more bang for it's buck the government could get then. If the government had no debt, I could see more of the argument made in this piece. But spending while over %90 Debt to GDP ratio won't ever help. The economy can't be as dependent upon the government as it is right now.

One big, unspoken assumption from Mr. Reich is that we (the government) actually know the right thing to do. Unlike physics, you can't run experiments with the economy without affecting many people's lives. Let's be more humble and not assume we know for certain how to "manage" the economy. Stick to the basics -- don't spend more than you take in.

Unfortunately, higher debt and deficits is reducing the ability of the government to respond. However, there is still some breathing room, but until Congress and the President realize that they cannot waste any new dollar, that they must see a REAL job produced, with the money going into the hands of a REAL person who needs it and will consume it, that breathing room will keep dwindling until we find we've pissed all our money away to the GE's and Loyd Blankfeins of the world, and now they are frolicking on the sands of Rio.

Bob is correct that the Fed can't do it all, but the accumulated deficits have made fiscal action nearly impotent. Too bad Bob did not advocate for more restraint on spending the past 30 years.

Yes, that's right, now isn't the time to cut spending, just like now isn't the time to stop drinking. Tomorrow, tomorrow, I'll finally get clean tomorrow. This kind of thinking is exactly what junkies do, and what has gotten us to where we are today. There is no easy way out. We spent the money, it's gone. We over consumed for years, now we must under consume. You don't hear this much from populist politicians, or their economist schills, because it doesn't get votes.

Why can't CongressCritters figure this out - to be fair about 50% do understand.

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