Originally Published: May 7, 2014 6 a.m.
The geniuses who run the economy have created the worst of both worlds.
There are two camps on the key question of whether we should be pumping money into the economy to ramp it up and recover the lost ground of the crash. This issue often comes off as esoteric, but it is really quite simple.
The unemployment rate and the inflation rate tend to be like a seesaw: when one is down, the other is up. It is the job of the Federal Reserve to try and balance them. When unemployment is too high, it pumps in money to get the economy going. When employment is doing well and there is enough money, then prices start to creep up. While a little inflation is okay, too much creates real problems, so the Fed tightens the money supply to cool things down.
One camp has been in a panic for years, certain that runaway inflation is about to burst out any second now, and believing the Fed is horrible for maintaining this easy-money policy and watering down our dollars. The other camp sees the traditional circumstances that require current policy; unemployment too high and inflation low, so add money to the economy.
The panicked camp is dominated by non-economists, particularly the financial and business elites pursuing self-interest, by grandstanding politicians who've bought into their rationale, and by gold-standard fanatics. They all apparently live in a magical, theoretical world where a fixed amount of money will work even in a country with a growing economy and growing population.
The other camp is dominated by economists.
The anti-Fed policies would favor those at the top, who do better with low inflation. They aren't worried about jobs, and they tend to be the ones to whom debts are owed. Inflation makes payments in the future on existing debts worth less, so low inflation is favorable to them. Plus, high unemployment means workers are desperate and will take jobs for less.
There are plenty of economists, though, who worry that the Fed's easy money could lead to a bubble of speculative investments, which could pop and cause painful losses in the stock market and overall economy. While that is a legitimate concern, what we don't need to worry about is an inflation spiral, because that requires employees having the leverage to demand inflation adjustments. They don't have anything like that kind of leverage these days. That speculative bubble, though, could happen.
The Fed's money could lead to such a bubble because the money it is pumping tends to go to the top. If it were getting into the hands of ordinary people who need it and would spend it, that would ramp up the economy. But when it mostly ends up at the top, it does little good because the top already has a lot, and they can't invest more in good things like expanding factories because there aren't enough buyers. So they use it to speculate.
The reason the Fed's money ends up at the top is partly tradition. It is funneled through the big banks, which are supposed to lend it out to expand the economy, but there hasn't been much demand for expansion. It is partly lack of imagination, as there are ways the Fed and government could work together to pump money where it's needed. It is also partly Congress standing in the way. Congress could help build the economy up, but instead our representatives are busy damping it, cutting budgets, ignoring infrastructure needs, etc. That results in the Fed having to do that much more.
The Fed is caught between a rock and a hard place because it is doing what it should by pumping in money, but it is pumping into a broken economy that doesn't use it effectively to build things up.
This is what the geniuses have created, a broken economy. It's part the fault of Congress, as I've described, and part the general culture of high finance and big corporate leaders, who have huge influence on Congress and business. They have wrestled the economy into a perverted form in which money pools at the top while everyone from the middle on down runs on fumes. Well, the middle-on-down is the market, the heart of the economy. If they are not healthy the economy is not healthy. So no matter how much money pumps in, not enough gets to where it needs to go, and the goal of a built-up economy is never achieved.
The Fed ends up with the choice of either trying to reduce unemployment at the risk of a financial bubble, or backing off to avoid the bubble and abandoning the unemployment problem.
So the geniuses have created the worst of both worlds - permanent high unemployment with the corresponding lower wages that brings - while our tool for curing that, the Fed, has been rendered ineffective, able only to use its resources to create damaging bubbles.
Genius. Just genius.
Tom Cantlon is a local business owner and writer and can be reached at comments at tomcantlon.com.