I try not to focus posts on contrasting viewpoints of other folks when addressing issues but, in this case, an example may be illustrative of my viewpoint and helpful in providing some important context for relative valuation.
Although I did not see much of the news yesterday regarding the release of the Federal Open Market Committee (FOMC) statement, I did get a chance to briefly see a discussion on CNBC regarding the issue. Accordingly, I would like to address some practical political issues, in addition to my past discussion on economic issues, because theoretical optimums can often be left “on the cutting room floor” if not crafted in a palatable way for all affected parties.
Steve Liesman (sometimes considered to provide a more Democratic viewpoint, at least, relative to his counterpart for the discussion, Larry Kudlow) was discussing the “surprising” decision by the Fed Chairman Ben Bernanke to give a more vigorous viewpoint on fiscal policy (i.e. government spending) through the FOMC statement (“but fiscal policy is restraining economic growth“) than he believes Alan Greenspan would have given when he was the previous Chairman.
Kudos but, chances are, the Chairman is leaving soon, and the NYT mentions (likely next Fed Chair) Janet Yellen might arise just in time to remind us of the ol’ school Ben Bernanke (in his case, when he gave the helicopter speech in ’02). Ms. Yellen’s desire to focus heavily on the unemployment aspect of the dual mandate with her monetary policy decisions is admirable though, perhaps, not optimally efficient.
Monetary policy is already being strongly used and does not have the ability to achieve the desired employment goals discussed. Furthermore, it does not compare favorably to the positive side effects of fairness, transparency, and efficiency that fiscal stimulus in the form of tax reform would provide. Low rates are not why lending is sub-par to some, a weak economy is. Hence, insert tax reform.
This fiscally stimulative reform takes care of that weak economic problem, and would ultimately prove to be “cheaper” than what our current path of monetary policy is potentially going to cost us. We are already at over 3 trillion on the Fed balance sheet, and I disagree with folks who believe it will be any lower than that anytime soon.
I would be surprised if this essentially off-balance sheet debt doesn’t eventually go to at least 5 trillion. And for what? As strong as an economy as if we implemented the tax reform I’m proposing? Obviously not.
I am not going to address what the net cost of that debt will be in this post, but it is not free. I look forward to addressing this important issue sooner than later.
Liesman championed both strong monetary stimulus (I disagree) and fiscal stimulus (I agree indirectly). However, he did not focus his discussion of increased government spending (i.e. fiscal stimulus) as optimally being in the form of tax cuts, as I would prefer.
Kudlow likes monetary policy as is. This is surprising – at the end of the day, it is benefiting the rich (as would be expected by some) but, generally speaking, the common wisdom is that doves are preferred by Democrats, while tighter monetary policy is generally known as being preferred by Republicans. Unfortunately, neither party may be for tighter monetary policy.
Kudlow wants fiscal restraint, though he did discuss the importance of tax reform. Accordingly, I believe Republicans, such as Kudlow, will be pleased by many of the specifics in the tax reform such as lower marginal income tax rates, and the implementation of much-needed corporate tax reform. Democrats will be pleased by this fiscal policy that will prove to be the most effective in achieving their stated focus on helping ensure the employment picture improves.
The government’s role is not to directly create jobs other than those necessary to carry out government functions. However, the federal government should aim to operate at maximum efficiency in order to ensure the optimal backdrop for a thriving economy in which jobs are most likely to be plentiful.
To ensure long-term fiscal solvency, entitlements will need to be addressed further than the slight adjustments I previously proposed. I will likely spell out in an upcoming post more information on how Social Security can become more of an insurance-esque system, as was originally intended.
Everyone should be buying “don’t retire broke insurance” and spreading the cost, in theory. Not sure why that rationale has gotten lost in the shuffle.
I briefly saw that CNBC decided on Squawk Box yesterday morning to feature some segments on an interesting and important viewpoint from Richard Haass and Erskine Bowles, and I agree with them that this situation is urgent.
Moreover, Bowles echoed my sentiment above that the Social Security system was very different upon origination than it is now. At that time, the lifespan of the average American was below the age of 65, now it is much longer.
The Bowles commentary was interesting, and I appreciate his motivation of not handing down a worse standard of living than his generation enjoyed (and I would obviously prefer not to live in it as well).
I look forward to preparing some potential costs within the ranges for different rates mentioned in my reform proposal, so that those that that may find the plan important will have a menu of choices, as well as comparing the rates (when applicable) with those proposed in the Bowles-Simpson plan.