Fed chairman Jerome Powell is reflected in the sneeze guard held between him and members of the House Committee on Financial Services on June 30, 2020 in Washington, DC, over the oversight of the Treasury Department and the Fed Reserve Pandemic response was established.
Bill O & # 39; Leary Pool | Getty Images
Treasury and Congressional government spending and stimulating bond purchases from the Federal Reserve are at unprecedented levels.
US deficit spending so far this year is over $ 3 trillion. While the costs are clear, the benefits are lesser. Financial relief for millions of Americans on leave or unemployed has been a humanitarian godsend.
Some argue that it was too much, and it may have been for some, but in times of crisis, moments of need is more better than not enough. The relief of the first $ 1,200 checks and ongoing supplemental unemployment insurance was the difference between being able to endure the lockdown and the hunger of many of our fellow Americans.
But as the government spends, the debt mounts. The Federal Reserve's balance sheet has increased by about $ 3 trillion this year, and the Fed is encouraging Congress to give a bigger boost. Many are beginning to wonder whether more stimulus is the right answer or is just an economic rope pulling?
After the banking crisis of 2008 and 2009, the Fed began to add to its balance sheet by purchasing government bonds to provide liquidity to the banking system and keep interest rates low. Much of this spending is known as quantitative easing. And it worked – somehow. Despite all the spending, the economic catastrophe was successfully averted, but GDP growth never got much better than around 2% per year.
In February, unemployment was around 3.5% and wages began to rise. We may have been at the beginning of an organic renaissance of demand and growth. Unfortunately, we will never learn how the effects of a pandemic plunged the US and most of the world into recession and unemployment soared above 15%. The response to this great recession, which can in fact be depression, is a remarkable increase in the use of stimuli.
Time for a different approach?
The Fed is now encouraging additional government spending to stave off a deeper recession. Congress and the White House are arguing over this spending package and seem stuck. Will more spending lead to economic growth or is it time to take a different approach?
Money and household spending have not seen significant growth over the past decade. Our current efforts continue to make the same mistakes. There are two main mistakes: firstly, liquidity fluctuations can prevent economic collapse and bring the necessary relief, but they are barely able to stimulate sustainable growth. If growth does not come, the political decision-makers give further impetus. Second, cheap money has increased supply and done little to increase demand.
We can increase donut production, but we cannot increase the number of willing and able donut buyers.
I have three conclusions: Milton Friedman's idea that inflation is a monetary phenomenon always and everywhere is wrong unless the monetary incentive creates demand. Without increased demand there is no inflation. Second, the funding of QE has not produced a multiplier effect over the past decade. A trillion dollar injection adds a one-time increase in the trillion dollars and another trillion in debt because there is nowhere else in the US to add an extra trillion. The 1990s was the last time the US ran a surplus.
Third, it would have been better if the trillions of dollars had been spent on something that would grow and create jobs and increase over time. This would be the type of investment that the private sector or individuals would make. Remember to spend a trillion dollars to get every American to an amusement park. The spirits would be lifted and people would have fun, but they would go and go back to the same old, same old, and you would spend a trillion in cash. (You would LOVE the amusement parks though.)
What if we spent trillions of your trillions on training in computer coding, artificial intelligence jobs, renewable energy jobs, and infrastructure rebuilding jobs? Those trillions of dollars would create a generation of producers and earners, as well as creative innovators and problem solvers who would improve the future for generations to come.
Those trillions of dollars could generate returns over many years that would also lead to higher tax revenues. The devastating part of all of this one-buck-for-one-bang aid so far is that it keeps piling the national debt without awakening the continued economic prosperity to pay off the debt. This is a shameful legacy and legacy for our grandchildren.
The stimulus must stimulate. We have a chance and a common national interest in building a better economy out of the ruins we find ourselves in. The argument shouldn't be about more money or less money – but the money is an investment in the country's long-term health that will create a better tomorrow than yesterday, both socially, civically and purely economically?
In the end, the republic will survive. It doesn't look like an easy walk from my place, but putting our next dollar in on things that can grow and improve the condition of America makes a lot more sense than another trip to an amusement park.
Michael Farr is the Founder, President and CEO of Farr, Miller & Washington Investment Counsel.