Unconventional Options for Growing the Economy
For months, a debate has raged over whether the Federal Reserve, the country’s central bank, should do more to help the economy — particularly to gin up more employment. At The Washington Post, Neil Irwin builds on a helpful metaphor from The Nation’s Chris Hayes to explain how these unconventional policies might work, and the dangers involved:
“„If the nation were a farm, Hayes argued, the Fed would be the agency in charge of water and irrigation. Its job is to keep water (money) flowing enough to maximize crops (strong job creation), but not pump in so much water as to cause flooding (inflation). We’re currently in an extreme drought (a deep recession), but the Fed is refusing to pump in more water because it’s afraid that doing so will cause flooding down the road.
“„[...]
“„This drought is so bad that the Fed has already drained its main reservoir completely (cut the federal funds rate to zero). So if it’s going to take new efforts to water the fields, it has to find more water through some unconventional means, such as by airlifting water in by helicopter, or piping it in from a nearby lake. (These are the equivalents of quantitative easing, or buying Treasury bonds and other securities to increase the money supply and drive down long-term interest rates).
“„The problem is, while the Fed has lots of experience and knowledge about how the controls on its normal reservoir work, and how much to open the valves to get the right amount of water onto the fields, these other tools are untested. If they pipe water in, they’re not sure how much will get to the fields–it might be too little to do much good, and it might be so much as to cause flooding.
“„They’re not sure about the impact of helicopter airlifts either; they might be effective at getting more water onto the fields, but there’s a small chance they’ll crash and burn and thereby set the fields on fire. (That’s what would happen if quantitative easing by the Fed caused global investors to believe they would continue printing money to fund budget deficits indefinitely, which could cause a big rise in inflation expectations and a long-term loss of confidence in the U.S. economy).
“„Meanwhile, while the fields are still awfully dry, there has been a little bit of rain in the last few months (the economic recovery is underway, though it is sluggish). And Fed leaders’ weather forecasting suggests that rain levels will continue to gradually return toward normal (their economic forecast is for continued expansion), which would render airlifts of water unnecessary.
I am convinced by the argument that the Fed should do more. But I am more convinced that the simplest, best way to ease unemployment — and a way with few unexpected consequences — would be for Congress to do authorize more stimulus spending, either via, say, a huge payroll tax holiday or a new spending program. A massive Treasury mortgage-relief program would work too. Sadly, those options seem politically infeasible, leading to the consideration of measures such as quantitative easing.
