In the wake of the Federal Reserve’s decision to raise it short-term interest rates target for the tenth straight meeting in order to combat what it sees as untenably high-inflation, it’s time to assess what has happened economically in the United States over the past year—the stock market has gone from strength to weakness; home buying has slowed precipitously; wage growth has plateaued; inflation has moderated; growth as measured by GDP is barely above zero; and the public mood on all things economic has soured.
Some of these trends are also global, as countries worldwide are still adjusting to the post-pandemic dislocations of supply chains combined with excess stimulus. Given the oddness of the past three years, the U.S. is actually doing OK. Inflation is coming down and no recession as of yet. Due to that, policymakers seem to believe they are pursuing the right course. But from the Fed to Congress to the White House, the reality is that government policy now is a severe drag and that what is an OK economic climate would instead be a superb one if policymakers would simply stop doing dumb things.
Government officials at every level should adopt a new mantra, a Hippocratic economic oath: do no harm. Newly minted doctors take the same oath to do no harm as one of their foundational medical principles. Economic policy should start with the same presumption.
Yet, wherever one turns, harm seems to be the result of careless policies, often ideologically driven. To be fair, most policy stems from a desire to do well, but good intentions are not sufficient.
Where to start? First there’s the aforementioned Fed, which in its zeal to fight inflation seems to have forgotten that economies are complicated systems and that focusing only on one problem has a way of creating others. The most aggressive rate increases in decades have led bank customers to move their money from low-yielding savings accounts to money market funds that now approach 5% yield. That’s good for them but very bad for banks that have relied on customer deposits as a cushion, and bad as well for regulators, including those at the Federal Reserve, who have failed to appreciate how much stress those rate increases is causing the banking system. The result has been three of the largest bank failures in U.S. history, which has surprisingly yet to create a contagion because of the overall resilience of the system not because of any great acumen on the part of government officials. The lesson should be to tread very carefully – do no harm – from here on out. Even with its language in the latest rate increase suggesting a pause to its hikes, there is little evidence that the Fed itself is learning those lessons.
Then there is the looming debt ceiling crisis in Congress. Over the past decade, the House Republican representatives have turned what had been a pro-forma authorization to raise the federal debt to meet spending obligations into a second chance to renegotiate legislation already passed. The result has been again and again a game of chicken where Republicans threaten to torpedo the full faith and credit of the U.S. government in the name of fiscal responsibility. Until this week, the Biden Administration had refused to discuss any changes to previously approved spending, which in its own way was as short-sighted as the Republican determination to let the government default on its debts. Wrong or right, the political reality is that raising the debt ceiling has to be agreed on by all sides, which means “no negotiation” as a strategy violates the do no harm mantra. You don’t get not to negotiate, just as the Republicans don’t (or rather shouldn’t!) get endless do-overs to revisit legislative and spending fights they already lost.
Next are the continual calls for higher taxes, especially in blue states where taxes are already quite high relative to other parts of the country. Yes, New York City (where I live) is a vast, complicated place, with its own university system, a complex public transport network, not nearly enough affordable housing and billions of dollars in defrayed infrastructure needs. And yet there are other ways to meet public needs without endlessly raising taxes, as states such as Florida and Arizona have demonstrated. No part of the U.S. is ideal when it comes to funding public goods, but the orthodoxies of Progressives in California, New York, Illinois and elsewhere that the best way to fund vital needs is ever higher taxes on the wealthy misses the key reality that anyone can move anywhere in the United States, especially the wealthy. As taxes go up, tax collection does not, because the people being taxed can simply move, and many have.
Making sure that people pay the taxes they should is vital to any healthy society that cares about common goods, but in return for high taxes, citizens should expect high levels of competence and service. That is one reason why Scandinavian countries, for instance, have publics that support high taxation: government is competent and provides high levels of service in return. So in the do no harm mantra, government should provide competent services with tangible results in return for taxes, especially high taxes. Otherwise, tax increases end up being not only useless but also undermine the very economy they seek to bolster. In New York State, at least, the most recent budget left out the taxes that progressives wanted, which is a step in the right direction.
And then there is regulation. Government regulation of the free market is an imperative, essential public need. But over-regulation driven by ideological zeal is destructive. Today, for instance, the Federal Trade Commission, headed by Lina Khan, is stuffed with anti-trust zealots. That is not hyperbole. Time and again, Khan and her staff have made clear that they believe that big companies are a threat to the well-being of the middle class. Yet there are no coherent arguments that size leads to consumer harm or anti-competitiveness per se, though that is sometimes true. But the big equals bad has led, for instance, to antitrust enforcement against Microsoft for attempting to buy video game maker Activision, and to the FTC quietly colluding with the European Union and UK regulators to take actions that U.S. regulators have a harder time doing.
Demonizing Microsoft, one of the most innovative and creative American companies of its age, one that has matured into a responsible corporate actor, is the opposite of do no harm. It is an act of hubris based on ideology that sees only caricatures and villains. But in multiple instances, Khan and her counterparts at the antitrust division at the Justice Department have shown a predilection for ideology over pragmatism.
The U.S. economy remains startling dynamic even in the face of stunningly inept policymaking—for now. The Fed is dancing dangerously close to triggering a major banking crisis after having triggered a minor one. It risks reversing two years of wage gains for tens of millions of working Americans in the name of fighting inflation. House Republicans have failed to use the debt ceiling as the weapon they want in the past, but in the next month, their zealots could well push the U.S. to a default with quite unpleasant consequences. Progressives have not been able to soak the rich nearly as much as they would like, though they have on the plus side made sure that policy attends to corporate tax dodging. And some regulators have cast a pall but have not yet created a climate of fearful sclerosis. But without a better set of guardrails that keep policies sane enough, we might just yet manage to do lots of harm to ourselves, and we we will have only ourselves to blame.
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