If the Fed Can Stimulate, Why Is Middletown Still So Poor?
Middletown, OH is the locale of the much-read and much-commented on J.D. Vance memoir Hillbilly Elegy. Vance describes a part of the U.S. that's been economically collapsed for quite some time.
Middletown’s relentlessly downtrodden situation came to mind while reading a Wall Street Journal excerpt of former Fed Governor Kevin Warsh’s recent talk at a Hoover Institution economic conference. Warsh made the point that “[W]hen monetary policymakers herald their record of job creation, they risk their institutional prerogative.” Translated, if the Fed can fix things, and celebrates being able to, it risks becoming a growth agency instead of a central bank.
All of the above of course assumes the Fed can stimulate. This is a debatable presumption. Warsh at least somewhat agrees that it's debatable. He makes plain that “economic expansions often owe more to the resilient, macro-foundations of the economy than macroeconomic fine-tuning,” but at the same time he’s furthering the broadly held view that the Fed can play at least somewhat of stimulative role if it chooses to.
But before getting into whether the Fed can actually enhance economic output as monetary types think it can, it’s useful to first ask if the Fed should at all be in the business of stimulating what’s limping? Lest readers forget, recessions are painful but also healthy periods where individuals and businesses rush to correct their errors. Implicit in Fed stimulation is that the urgency to fix wasn't working wouldn't be as great; thus limiting long-term economic progress.
In Warsh's case, though he thinks the Fed can certainly improve what’s weak, he’s properly a skeptic about it utilizing those powers. He worries that if it operates as “a general purpose agency of economic policy,” the Fed will not be able to maintain its independence. In other words, if the economy is weak amid deep Washington legislative division, there might be pressure on the Fed "to provide more stimulus.” Oh well, there's already that pressure. Republicans and Democrats are already in agreement that the Fed has magical powers to create economic growth through interest rate and monetary machinations, and they routinely call on the Fed to use its powers. They're confused. Warsh seemingly agrees?
He must know, or should know, that the Fed can't engineer job creation and prosperity. If it could, the central bank would have already done so. The Fed would have already been charged with stimulating what’s essentially growth-proof. Specifically, the Fed would have saved Middletown by now.
That it hasn’t, or hasn’t even tried, is telling. Indeed, imagine if the Fed, eager to boost Middletown’s economic situation, proceeded to buy up bonds held by Fifth Third, PNC, and American Savings; three financial institutions with banks located right in town. Loanable dollars in Middletown would surely surge, but logic dictates that they would quickly vanish. The aforementioned Fed move would be even less stimulative than a helicopter drop that similarly wouldn’t change Middletown's on-the-ground economic situation one iota. The Fed’s actions would be meaningless simply because banks can’t long stay in business lending to individuals and businesses with limited prospects of paying monies borrowed back.
More realistically, money flows to where there's production and without regard to the wishes of politicians and central bankers. Generally it flows to where human capital is abundant. At present at least, there’s no indication that talented commercial minds are populating Middletown. That they’re not speaks to how toothless the Fed’s “monetary” policies would be if it were charged with fixing what’s broken. The Fed can’t alter reality. But can it enhance an already happy reality?
Figure that at least some of the so-called Fed stimulus theoretically directed at Middletown would near instantaneously find its way to booming Columbus, OH, which is 90 miles away. Full of the commercially skillful, including (no doubt) transplants from Middletown, what bankers wouldn’t lend in the former they could easily lend in Columbus. With economic activity in Ohio’s capital city more than robust, dollars necessary to liquefy trade and investment there are ubiquitous. And that’s the point.
Where there’s production, there’s always “money.” Money is a consequence of production, not the instigator of it as so many monetary mystics believe so deeply. The previous truth explains why dollars are abundant in Columbus, but also the currency of choice (in lesser amounts) in Caracas, Havana and Teheran. The Fed didn't engineer any of these monetary outcomes, nor could it. With trade and investment, underlying it always is an exchange of products (trade), or the exchange of products for a future claim on products (investment). The dollar is everywhere there’s commerce precisely because the greenback, despite its periodic weakness, strength and instability since 1971, is globally accepted as a medium of exchange. Translated, the dollar can be exchanged for goods and services around the world given its acceptance as the world’s currency. That what is viewed as good money is everywhere that production is evident, and also scarce where it isn’t, speaks to just how superfluous the Fed is.
It’s a reminder that the Fed couldn’t and can’t do what Warsh is willing to say it somewhat did for the U.S. economy after 2008. The Fed can’t take a bow for having provided “greater monetary accommodation” simply because "monetary accommodation" is a non sequitur when it comes to economic growth. If its creation, or “accommodation” could actually stimulate as so many believe, and as Warsh somewhat believes, then an always politicized Fed would have already used its magical powers to fix the countless U.S. locales for which economic hardship is a constant.
Notable here is that much of the Fed's alleged “monetary accommodation” quickly exited the U.S. in 2009 and beyond, and did so for obvious reasons: money has no purpose or circulatory use if there’s no trade and investment to liquefy. QE was a non sequitur rooted in the laughable presumption that a lack of so-called “money supply” causes economic downturns. The thinking is backwards. Slow periods of economic growth naturally correlate with reduced “money supply,” as opposed to slowdowns being caused by money “scarcity.” There’s no such thing.
To read Warsh’s remarks, one gets the feeling that he’s slowly coming around to the basic truth that the Fed’s relevance has forever been overstated. He perhaps resists somewhat out of loyalty to his former employer. He could do better. In stating the obvious, Warsh could uniquely spark a discussion that would not lead to the Fed’s abolishment, as the latter would similarly be a non sequitur. Actual market forces abolished the Fed long ago.
