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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