The U.S. economy is stuck at a 2% GDP growth rate, with unemployment over 7%, a record exodus from the labor force, and 1.9 million fewer jobs than at the start of the recession in December 2007. What will Janet Yellen, the nominated chairwoman of the Federal Reserve, do to fix the economy?
Not much, it appears, if she is wedded to accommodative monetary policy and a continuation of Fed Chairman Ben Bernankes regime.
The fundamental problem is that with a dysfunctional Congress, burgeoning entitlement spending (including a new health insurance entitlement), one of the highest corporate tax rates in the industrialized world, and costly regulations discouraging investment, many Americans look by default to the leader of the Fed to help the economy. Neither by statute nor by actual powers can the Fed alone cure all the economic ills that afflict America.
One thing is certain though: Yellen is a nice person, and she cares. In the State Dining Room on Wednesday, announcing her appointment, President Obama said that Yellen "understands the human costs when Americans cant find a job. She has said before, ‘These are not just statistics to me. The toll is simply terrible on the mental and physical health of workers, on their marriages, on their children. So Janet understands this. Americas workers and their families will have a champion in Janet Yellen."
No one doubts the empathy that high-ranking federal officials feel for ordinary Americans. But caring about Americas workers doesnt necessarily translate into policies that improve the economy. Record-low interest rates and monthly purchases of $85 billion of Treasury bills and mortgage-backed securities have not succeeded in increasing employment.
On Wednesday, Yellen admitted, "While we have made progress, we have farther to go. The mandate of the Federal Reserve is to serve all the American people, and too many Americans still cant find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively."
During the confirmation hearings before the Senate Banking Committee, senators should ask Yellen what it means for the Fed to do its job effectively, and how she would measure the success of the Feds policies.
Yellen reportedly shares Bernankes view that a weaker currency will help the economy. But if weak currency were an economic cure-all, then countries with the weakest currencies should have the strongest growth. Americas historical economic growth should have been greatest when its currency lost most of its value. Nations should be able to print their way to prosperity with their inflated paper currencies. Inflation and hyperinflation should be an advantage, not a disadvantage.
Not one of these statements is true. Countries that have tried weak currency have not succeeded economically. In contrast, Americas stock markets have soared when the dollar strengthened. Caring alone cannot inspire policies that have been tried and failed.
The Federal Open Market Committees decision to move to QE3, purchases of more mortgage-backed securities and Treasury bills, came from the hope that a further diminution of already record-low interest rates will spur consumer spending. Low rates could be helpful in the initial stages of a recession. But these actions, following QE1, QE2, and Operation Twist, are likely having minimal effects on the economy four years into the recovery.
Savers whose interest income has been decimated by the Feds aggressive monetary easing are hurting. Losers from low interest rates are those who save and who live off of savings. Thrift is punished, spending — especially on credit — is rewarded. The elderly who have saved money for retirement find that their bank accounts do not produce as much income as anticipated. When inflation rises, as it invariably has done after monetary growth, the real value of nest eggs shrinks together with the value of the currency.
Neither Yellen nor Obama mentioned seniors or savers in their remarks at the White House on Wednesday.
Congress and the president, rather than negotiating to solve Americas economic problems, are delaying in passing a budget. They are leading the country to the brink of default, adding uncertainty to economic decision making. The Fed cannot bail Congress and the president out of their mistakes.
The logical path is for Congress to pass some entitlement cuts for future years to bring down long-term levels of debt. But Obama wants Congress to let tax rates rise. The Republican House objects to raising taxes because of the negative effects on economic growth.
America could reduce its problems by streamlining its regulations on labor and business. The Affordable Care Act discourages hiring, except for part-time workers. The Environmental Protection Agency has brought out new regulations that would eventually end the use of coal-fired power plants, even though energy generated by coal accounts for 40% of Americas electricity usage.
When all else fails and when politics stifle economic growth, people turn to the Fed to help the economy, as if the Fed were populated with magicians. But economics is not the dark art of magic, it is the cold reality of markets.
Janet Yellen cares about American workers. But however much she cares, she cannot cure the economy by continuing an accommodative monetary stance. Congress and President Obama need to make the tough decisions that will increase economic growth.
Original Source: http://www.marketwatch.com/story/janet-yellen-cant-fix-the-economy-2013-10-11