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Say What We Mean and Mean What We Say
Stock-market optimism seems to be outpacing the economic recovery. While some soothsayers predict the market is therefore due for a “correction,” the more important question is, why can’t the economy rebound faster? Two essays in the Wall Street Journal this week suggest different answers: first, the Fed’s near-zero interest rates, and second, a “trust deficit.”
John Taylor, a professor of economics at Stanford University, argues that current Fed policy — keeping interest rates extremely low for the foreseeable future — has the perverse consequence of reducing the amount of credit being offered to prospective borrowers. Taylor acknowledges the majority view of the Fed’s Open Market Committee is that “ultralow interest rates and asset purchases reduce unemployment by increasing aggregate demand, and they back up the argument with macroeconomic models.”
But those models don’t apply to the unusual circumstances we’re in, he contends. In effect, “the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low. The perverse effect comes when this ceiling is below what would be the equilibrium between borrowers and lenders who normally participate in that market. While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate.” With lenders supplying less credit at the lower rate, he writes, “The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy.”
Jon Hilsenrath, who reports on the Fed and economic matters for the Journal, focuses on human behavior rather than the dismal science. “Trust is an essential lubricant for economic activity. It makes investors, employers, policy makers and consumers willing to take part in transactions with each other, which in turn drives spending, investing and growth,” he writes. “Research has shown that measures of trust in society are closely connected to economic growth and the effectiveness of government. In places where trust breaks down, economic development is damaged.”
He observes that trust has fallen sharply in U.S. society since the recession started in 2007; surveys show people don’t trust banks, big business or Congress, among other things. And while there is some sign that the trust deficit is bottoming out and starting to recover, Hilsenrath notes that trust of government fell again after the messy resolution to the fiscal cliff problem.
I don’t know one economic model from another, but Taylor’s analysis makes sense to me, and I’m very confident that Hilsenrath’s analysis holds water. In short, the collective we are helping to slow our own economic recovery. Sure, many other factors are involved, but we shouldn’t ignore or minimize our culpability.
How can we fix what we’re doing wrong? We could start by resolving to say what we mean and mean what we say, without being mean about it. That, and delivering on promises, will go a long way to rebuilding trust among and between us. Then, we can trust that our leaders will take dissenting views into account as they make policy and regularly reassess it.