Economic Malaise: A Failure of Policy, Not Rhetoric

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There has been a lot of commentary recently about whether the Fed's latest round of quantitative easing will be effective in raising the growth rate of the US economy and therefore reducing the unemployment rate. Whether it does or not - and I am firmly in the camp that believes it will do more harm than good - the more interesting and relevant debate is why we have been reduced to attempting to address a non-monetary problem - unemployment - through unconventional monetary means. Why has the Fed been forced to take such drastic action? Why is monetary policy seen as the only economic policy lever available to US policymakers? Is there nothing left we can do to raise the growth rate of the US economy?

The most basic function of monetary policy - of the central bank - is to balance the supply of and demand for money such that its value remains a constant. The Federal Reserve has complete control over the supply of dollars but very little control over the demand. Demand is determined mostly by all the other economic policies that fall in the political realm. Tax, regulatory, trade and a plethora of other policies determine the demand for money. It is the job of the Fed - or it surely should be - to adjust monetary policy such that supply balances demand to produce a stable dollar.

By any measure of the value of the dollar, the Fed has obviously failed at this most basic task. It would be easy to blame this failure solely on the men who have directed the policies of the Federal Reserve and indeed I have in the past done exactly that. I am not impressed in the least with the performance of Ben Bernanke, Alan Greenspan or Paul Volcker in their roles as Chairmen of the Federal Reserve. However, the rise in the price of gold - which I believe is still the best measure of the value of the dollar - is not a failure of monetary policy. If we were on a gold standard and had no Federal Reserve, rather than talking about the rising price of gold we would be talking about the persistent outflow of gold from the US economy. And there would be no doubt about who to blame for this obvious loss of national wealth.

It is the politicians who are tasked by the Constitution with coining and regulating the value of our money who are to blame. They delegated (abdicated?) this responsibility to the Federal Reserve and then expanded the Fed's mandate to include economic growth and employment, real variables over which the Fed has no control. Ben Bernanke and his predecessors have done nothing more than attempt to comply with the mandate forced on them by politicians who need a scapegoat for their policy failures. When "deficits don't matter" Republicans expand Medicare entitlements while also waging two wars, it is left to the Federal Reserve to attempt to offset the ill effects. When "spending is stimulus" Democrats pass bills no one except staffers and lobbyists has bothered to read, it is left to the Federal Reserve to finance the folly. If the economy is not growing at its potential and it is left to the Federal Reserve to attempt the monetary sleight of hand known as quantitative easing, it is due to a failure of our non-monetary economic policies. The rise in the price of oil and gold and the fall in the value of the dollar is a result of monetary policy but it represents political failure.

There is not much in the writings of John Maynard Keynes with which I agree but his rumination on the role of "animal spirits" in creating economic growth is one area where he undoubtedly hit the bulls eye. The optimism Keynes saw as being required to do something positive - to take a risk, to start a business, to hire a new worker - is notable most recently only by its conspicuous absence. Keynes saw these animal spirits as arising spontaneously but the pessimism that defines the national mood is a reflection of the present policy mix pursued by our political leaders. The Obama administration has taken a technocratic approach to solving our economic problems that elevates experts and czars to the commanding heights of the economy and demonizes the messy but effective process of allowing the market to find solutions through its trial and error approach. The unintended consequence of such an approach is to kill the animal spirits of those not included in the elite clique.

We have had these periods of malaise before. The late 1970s was a time when the can do American spirit was broken from political corruption, inflation and high unemployment; conditions not much different from today. President Carter told us that we had to accept our fate, that America was no longer an exceptional place and his pessimism inspired similar feelings in the public. Today, a bipartisan coalition of whiners endlessly hectors and threatens the Chinese for pegging the value of the Yuan to the US Dollar and sends a message to Americans, to the entire world, that American workers can't compete on the existing terms. Investors choose to invest in Asia and other emerging markets because we have told them through our rhetoric and actions that we intend to reduce the value of dollar denominated investments. Why would anyone choose to invest where the powers that be demonize you in the press and threaten to dilute your investments through currency debasement?

Animal spirits cannot be stirred by rhetoric alone. The severe economic problems we faced in the 70s were not due to a failure by President Carter to inspire us to better performance. The problems were real and President Reagan, the Great Communicator, inspired us to solve them but it wasn't just his words that motivated us. The policies he advocated were designed to allow us to reach our potential by getting government out of the way, to allow the good judgment of the people, the market, to guide the economy rather than the whims of the politicians and the desires of the business establishment. President Reagan succeeded where President Carter failed because he displayed a confidence in the American people through his policy choices and backed it up with his public optimism about the future.

Our current malaise is not caused, as President Obama and his party seem to think, by a failure to explain their plans for the US economy in simple enough terms for the average American to understand. This is not a failure of rhetoric. It is a failure of policy and a failure by our leaders to trust the American people to shape our own economic future. President Obama needs to remember the basics of how we achieved our past successes. We didn't achieve the highest standard of living in the world by protecting the status quo but by challenging it. We didn't get here by bailing out failing companies but by supporting the successful ones that took their place. We got here by embracing change, leaving behind the stale ways of the past and allowing new companies and bold individuals to find success on their own. We didn't get here because some politician decided to invest in the latest politically correct fad. We got here because we made it attractive for individuals to invest their capital here and because our policies provided a stable environment in which to do so.

The current technocratic approach relying on monetary policy and government spending as a means to stimulate growth cannot solve a problem rooted in a lack of passion and optimism. Our economic policy has been reduced to the absurd notion that real growth can be created if we can fool at least some of the people, some of the time - again - into believing that they are wealthier than they really are and that the judgment of a few politicians can substitute for the collective wisdom of the market. President Obama is an inspiring individual but his policies need to match his rhetoric. Until they do, any "recovery" that results from the monetary alchemy of quantitative easing will be temporary and false.


Joseph Calhoun is CEO of Alhambra Investment Partners in Miami, Florida. He can be reached at

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