The American economy continues as the world’s biggest and strongest with none other even close. The recent World Bank report upgraded its outlook for the global economy from 1.6 percent to 2.5 percent growth, based largely on stronger-than-expected growth in the world’s biggest economy accounting for 80 percent of that expected growth.
This and no recession in spite of high interest rates imposed by the U.S. Fed and other central banks to curb the inflation of 2021, inflation that was due to supply shortages of the Pandemic and the pent up demand-induced spending emerging from the Pandemic.
With the combination of easing supply shortages and tighter monetary policy, the rate of inflation has declined, more in the U.S. than in the other G-7 nations. Prices of some services and grocery items still remain higher than before the Pandemic, giving the nay-sayers grist to blame the Biden administration for “the worst economy ever,” which it definitely is not.
It would help if the media nitwits would ask what inflation will be like if Trump, as he promises to do if elected, places stiff tariffs on all foreign-made goods and engages in mass deportation of both legal and undocumented workers who do the work in construction, food production and processing, and child and elder care jobs. But that’s for another day.
We now take for granted the responsibility of government to manage the economy. Forget the hypocrisy of critics who insist that the government should keep hands off, as they assert that markets are “self-regulating and government intervention will only make things worse.” These critics quickly change their tune when things go awry, as during the Pandemic. Even during more “normal” times capitalism is subject to business cycles. Government is held responsible during recessions. Government is implicitly, if not explicitly, expected to “do something” to oversee a strong economy that includes availability of employment for everyone willing and able to work.
Most Americans are not aware that this has not always been a formal goal of the federal government. Let’s review some economic history.
The nation had gone through the decade of the 1930s with widespread unemployment and economic hardship. With the booming wartime economy of 1941-1945, even with price controls, rationing, and shortages of goods, American civilians lived far better during the war than during the Great Depression of the 1930s. With that taste of prosperity, people feared going back to the economy of the Great Depression. Massive military spending would be ending, troops would be released from military service and coming home — where would they all get jobs?
Post-war employment turned out not to be a problem. The pent up demand due to lack of spending power during the Depression, and shortages of goods during WWII, was met with effective spending power due to accumulation of war bonds and other savings by fully employed workers during the war. But with lingering memories of misery of the Depression, a strong economy came to be seen as a proper responsibility of government, resulting in legislation.
The original bill introduced was the titled the Full Employment Bill of 1945. It mandated that the government do everything in its power, including compensatory spending, to achieve full employment as an established right of the American people.
Conservative Senator Robert Taft argued that business cycles in a free enterprise economy were natural, and he objected to the compensatory spending. The coalition of Northern Republicans and Southern Democrats that controlled congress forced the removal of a “guarantee of full employment,” and compensatory spending. Weakened language nevertheless resulted in general goals of full employment, full production, and stable prices. It also created the Council of Economic Advisors, an appointed board to advise and assist the President in formulating economic policy.
The bill, renamed the Employment Act of 1946, passed unanimously in the Senate and by 322-84 in the House, and was signed into law by President Truman on February 20, 1946.
The taxing and spending powers of the federal government in the context of economic stabilization are known as fiscal policy. Fiscal policy is a powerful tool when implemented, as taxation and expenditures are immediately felt, and their effects spread through the economy. However, fiscal policy has been all but excluded as a tool to manage the economy, except in extreme cases such as the Pandemic, because of political implications beyond simply economic stabilization. Yes, conservatives are OK with reduced government spending to reduce inflation. But they have no qualms about expansionary measures featuring tax cuts, even during full employment, thereby contributing to inflation. These contradictions demonstrate the political implications of fiscal policy beyond economic stabilization.
The controversial political nature of fiscal policies has resulted in monetary policy as the major tool for economic stabilization. It’s all eyes on the Fed.
In contrast to fiscal policy being powerful, but politically problematic, monetary policy is weaker and slower to take effect, and intended to be politically insulated — somewhat anyway. Although the Fed does not answer to congress, it is not immune from harsh criticism by politicians and the public. The Fed is responsible for various banking regulations, but its main attention is generated by its power to set short term interest rates. This is of particular interest to the financial community, including bankers and professional money managers of Wall Street. And interest rates have wide spread repercussions for consumers through interest rates on credit cards and mortgage rates affecting housing markets.
The record low interest rates of past years have been credited with buoyant financial markets. The recent high interest rates intended to curb post-pandemic inflation were feared to sink those high securities prices and possibly cause a recession. Because of private and public spending and high corporate profits, the recession expected by money managers and many economists has not occurred, and financial markets are flirting with record highs.
With declining rates of inflation, Wall Street and investors have been anxiously awaiting the Fed to reduce interest rates expected to push financial markets to new highs. But the latest jobs report was stronger than expected, reducing the prospect of a September interest rate reduction.
That’s another topic for another day.
— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.
