In a familiar ritual, all eyes will be on the Fed next month to see if it raises interest rates, after Atlanta Federal Reserve Bank president Dennis Lockhart said he thought conditions looked favorable for an increase. But hold on—let’s take two steps back and ask why markets are so obsessed with the Fed’s potential quarter-point moves, and while we’re at it, why the U.S. economy is still growing slowly and why employment isn’t nearly as strong as the 4.9% unemployment rate makes it look. And lest you wonder where I’m going with this, the answer is that leadership failures are the explanation.
We’re all fixated on the Fed because monetary policy has become, as Mohamed El-Erian says, the only game in town. (That’s the title of his new book.) Governments worldwide have decided that printing money and cutting rates is the pain-free path to economic growth, except it isn’t working. Monetary policy has never been more than a temporary fix, and after eight years it has long since run out its string. It isn’t working anymore because it can’t.
So what’s the solution? It’s a range of government policies that have always been the foundation of a growing economy but that Washington has been utterly unable to enact. That’s the critical leadership failure, and that failure is why monetary policy is the only game in town, and why the economy remains weak. For example, everyone in both parties knows the economy would benefit substantially if U.S. companies could bring back some of the $2 trillion they hold overseas and invest it here. But tax law makes such a move economically crazy for them. Fixing the law would require a broad rewrite of the tax code, which is more than Washington leaders can even approach. So it doesn’t happen, and the trillions stay overseas.
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How about something much simpler, like enacting a federal budget? We used to do that regularly. Not anymore. The odds don’t look good for this year, even though President Obama and then-House Speaker John Boehner made a budget deal last fall. The reasons for continued inaction are insanely convoluted, but the bottom line is that the government may well be funded by continuing resolutions, short-term funding measures for individual programs or departments. Result: No one affected by the budget, including many businesses, can make long-term plans—another block to investment.
There’s so much more. Free trade is good for the economy, but one thing Donald Trump and Hillary Clinton agree on is that the Trans-Pacific Partnership is an abomination that must be killed, so its chances of ratification, at least pre-election, have shrunk to zero. Finding money for badly needed infrastructure, at a time when the Treasury can borrow money at the lowest rates in history, would seem a no-brainer. But too much of such funding ends up in boondoggles like Alaska’s bridge to nowhere or Pennsylvania’s John Murtha Airport (now called “the airport to nowhere”). The futility of attempting immigration reform is obvious as soon as you say the words.
Those are some of the policy fixes that help an economy grow, but for now they all look impossibly distant. That’s why the Fed is the only policymaker left to watch and why the public has actually said it likes colonoscopies better than Congress. It’s a non-partisan issue. At least for now, the critical mass of leadership just isn’t there.