–Less Optimistic That QE2 To Have Signif, Lasting Impact On Real Econ
–Critical Of Fiscal Stimulus Measures; No Sustainable Impact
By Brai Odion-Esene and Claudia Hirsch
NEW YORK (MNI) – Kevin Warsh, member of the Federal Reserve’s board
of governors, Monday took another opportunity to criticize the policies
of both his central bank and the U.S. government, voicing his doubt that
the former will have “durable effects” for the real economy, while the
latter did little to put the economy on a “more sustainable trajectory.”
“The United States would be better off with a third way: pro-growth
economic policy. After all, it is stronger growth that the U.S. and
world economies most urgently need,” Warsh argued.
In remarks to a Securities Industry and Financial Markets
Association event in New York that largely mirrored an op-ed he penned
for the day’s Wall Street Journal, Warsh described the current state of
the economy as “unimpressive,” referring to predictions of modest output
growth, high unemployment and low sentiment as “the new malaise,” rather
than the new normal.
“The current period of subpar growth and high unemployment is real,
but it need not persist,” he argued. “We should not lower our
expectations. We should improve our policies.”
With Congress locked in a stalemate and neither side willing to
give ground, the burden of jumpstarting a sluggish economic recovery has
fallen on the Fed, he suggested. However, Warsh said the Fed should not
be viewed as a “a repair shop for broken fiscal, trade, or regulatory
policies.”
“Given what ails us, additional monetary policy measures are, at
best, poor substitutes for more powerful pro-growth policies,” he said.
“Lender-of-last-resort authority cannot readily be converted into
fighter-of-first resort power.”
While acknowledging that the benefits of the Fed’s second round of
quantitative easing may be more substantial than he anticipates, Warsh
said he is “less optimistic than some that additional asset purchases
will have significant, durable benefits for the real economy.” The
FOMC’s action, he added, was necessarily limited, circumscribed, and
subject to regular review. It will be altered if certain objectives are
satisfied, purported benefits disappoint, or potential risks threaten to
materialize.
These risks include the Fed’s increased presence in the long-term
Treasuries market, which he called “nontrivial,” a larger than expected
spike in inflation that causes the Fed to consider tightening even with
high unemployment, and the risk that the Fed is viewed as monetizing the
federal debt.
And just as important, the Fed’s actions have meant an increasing
tendency by policymakers abroad to intervene in currency markets, to
administer unilateral measures, to institute ad hoc capital controls,
and to resort to protectionist policies. These could mean a more
protracted and difficult global recovery.
Warsh said the adoption of pro-growth economic policies in the U.S.
would strengthen incentives to invest in capital and labor over the
horizon, and place the country’s economic potential at the center of the
policy nexus. “Pro-growth policies would give us the best opportunity to
bring unemployment rates down dramatically,” he added.
And what form would these pro-growth policies take? According to
Warsh, pro-growth policies include reform of the tax code to make it
simpler and more transparent, and more conducive to long-term
investment. They would also demand reform in the conduct of regulatory
policy, so as to provide more timely, clear, and consistent rules so
that firms — financial and otherwise — could innovate in a changing
economic landscape.
It would not, he said, “protect the privileged perch of incumbent
firms — no matter their size or scope — at the expense of their
smaller, more dynamic competitors.”
Taking aim at the recent policies to combat the economic downturn
in the U.S., Warsh said the country can no longer afford to tolerate
policies “that are preoccupied with the here-and-now. Chronic
short-termism in the conduct of economic policy, he said, “has done much
to bring us to this parlous point.”
Reciting a litany of programs implemented by both the Bush and
Obama administrations to ease the impact of the recession, such as
stimulus checks in the mail, temporary housing rebates, or ‘Cash for
Clunkers,’ Warsh said these programs did little, in his view, to put the
economy on a stronger, more sustainable trajectory.
He called on fiscal authorities to “resist the temptation to
increase government expenditures continually to compensate for
shortfalls of private consumption and investment.”
Warsh stated his belief that sound fiscal policy “must do more than
reacquaint consumers with old, bad habits.” Rather fiscal policymakers
should aim to achieve more than simply coaxing businesses to do today
what they would otherwise do tomorrow.
He urged policymakers to give the supply side of the economy more
attention, warning that a failure to do would mean “the cyclical becomes
structural.” It would lead to persistent weakness in the labor markets,
he added, in effect, permanently disqualifying more workers from a place
in the labor force. The natural rate of unemployment moves higher and
potential GDP falls.
As for those who lament the increased savings and in his view,
prudence of American businesses and households alike, Warsh said such a
pattern should be celebrated, not arrested. “Larger, more liquid
corporate balance sheets and higher personal saving rates are the
reasonable and right responses to massive government dissaving and
unpredictable government policies,” he said.
He added that the steep correction currently being witnessed in
housing markets, while painful, sets the foundation for recovery —
“far better than the countless programs that sought to subsidize and
temporize the inevitable repricing.”
Warsh concluded that it is these transitions in the U.S. market
economy — and the adoption of pro-growth fiscal, regulatory, and trade
policies — that establish the essential groundwork for greater, more
sustainable prosperity.
** Market News International New York Newsroom: 212-669-6430 **
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