On Tuesday, February 8th, Richard Fisher, President of the Dallas Fed gave a speech containing some blunt criticism of Congress and the Executive Branch. As the budget battle is joined, Congress and the Obama administration will make decisions that will determine whether the country will prosper or decline.
Fisher's every word hits the mark.
Fisher's every word hits the mark.
It’s a hard hitting presentation that should be widely disseminated. Go to the Dallas Fed website and pull it up. While you’re there pull up his prior speech filled with more “straight from the shoulder” discussions.
Commenting on jobs:The new Congress and the new staff in the White House have their work cut out for them. You cannot overstate the gravity of their duty on the economic front. Over the years, their predecessors―Republicans and Democrats together―have dug a fiscal sinkhole so deep and so wide that, left unrepaired, it will swallow up the economic future of our children, our grandchildren and their children. They must now engineer a way out of that frightful predicament without thwarting the nascent economic recovery.
I have been outspoken about the limits of monetary policy as a salve for the nation’s fiscal pathology.[3] The Fed has done much, as I see it, to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home.[4]
The Federal Reserve has held short-term interest rates to nil. We have expanded our balance sheet to unprecedented levels, with the effect of holding down mortgage rates and the rate of interest paid on Treasuries and the myriad financial instruments that are priced off of Treasuries, including corporate debt. After much debate―which included strong concern expressed by one member with a formal vote and others, like me, who did not have voting rights in 2010―the FOMC collectively decided in November to temporarily undertake a program to purchase U.S. Treasuries that, when added to previous policy initiatives, roughly means we will be purchasing the equivalent of all newly issued Treasury debt through June.
By this action, we have run the risk of being viewed as an accomplice to Congress’ fiscal nonfeasance. To avoid that perception, we must vigilantly protect the integrity of our delicate franchise. There are limits to what we can do on the monetary front to provide the bridge financing to fiscal sanity. The head of the European Central Bank, Jean-Claude Trichet, said it best recently while speaking in Germany: “Monetary policy responsibility cannot substitute for government irresponsibility.”[5]
..,.
But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place.
The Fed does not create government debt; Congress does. Deficits and the unfunded liabilities of Medicare and Social Security are not created by the Federal Reserve; they are the legacy of Congress. The Fed does not earmark taxpayer money for pet projects in local communities that taxpayers themselves would never countenance; only the Congress does that. The Congress and administration play the dominant role in creating the regulatory environment that incentivizes or discourages job creation.
It seems to me that those lawmakers who advocate “Ending the Fed” might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.
A look within the United States makes clear the overriding influence of fiscal and regulatory policy. Monetary policy is uniform across the 50 states; the base rate of interest paid on a business or consumer loan or a mortgage in Michigan, California, Ohio or New York is the same as that paid in Texas. Yet there is a reason that Michigan and California each lost more than 600,000 jobs over the past decade while Texas added more than 700,000 over the same period. There is a reason that the population of Ohio grew by only 183,000 residents over the past 10 years, while Texas grows by that number every five and a half months. There is a reason that with each passing census, the state of New York has been losing congressional seats and Texas has been adding them; a reason that, in the recent census, California failed to gain any while Texas gained four. There is a reason that, as documented in the Jan. 12 issue of the Wall Street Journal, college graduates—the best and brightest of the successor generation—are leaving New York and Cleveland and Detroit and moving to Austin, Texas.[6] There is a reason no state in the union houses more Fortune 500 headquarters than Texas. There is a reason for the disparate employment growth that has taken place in the 12 Federal Reserve districts over the past two decades, data that are documented in the graph at your place setting.
That reason has nothing to do with monetary policy. It has everything to do with the taxation and fiscal and regulatory policies of the states. The cost of capital does not explain the different economic performances of the states; the cost of doing business has everything to do with those differences. However well-meaning tax and regulatory initiatives in the laggard states may have been when they were conceived and levied, they have had unintended consequences that have led to economic underperformance and job destruction.
Similarly, the key to correcting the underperformance of the American economy and American job creation does not presently rest with the Federal Reserve. It is in the hands of those who make fiscal and regulatory policy.
The Fed has reduced the cost of business borrowing to the lowest levels in decades. It has seen to it that liquidity is widely available to banks and businesses. It has kept the economy from deflating and it has kept inflation under control. This has helped raise the economic tide. Recent data make clear that the risks of a double-dip recession and deflation have ebbed and that economic growth and job creation are beginning to flow. Yet the ships of job-creating investment remain, with some exceptions, tied to the docks—or worse, are choosing to sail for foreign ports where tax and regulatory conditions are more favorable, very much in the same way that Ohio, Michigan, New York and California businesses and workers have navigated to Texas.
U.S. nonfarm payrolls fell by 8.75 million jobs from their peak in January 2008 to their trough in February 2010. Estimates are that the population of Americans of working age increased by 4.4 million during the same period, creating a shortfall of over 13 million jobs. Since February 2010, the shortfall has only gotten worse: Although employers have added approximately 1 million new jobs, the working-age population has increased by an additional 1.7 million. All in all, we have approximately 6 million more people of working age than we did when the recession began—and a net loss of 7.7 million jobs. Divining policies that will encourage the private sector to increase hiring by enough to make up some of this lost ground is both an urgent and a daunting task.
I don’t believe the Fed is constraining job creation. None of my business contacts, large or small, publicly held or private, are complaining about the cost of borrowing, the lack of liquidity or the availability of capital. Just this morning at 7:30, for example, the National Federation of Independent Business released results from a survey of 2,144 randomly selected small businesses. It said, “Ninety-two percent [of those surveyed] reported that all their credit needs were met or that they were not interested in borrowing.”[7]
A recent Wells Fargo/Gallup Small Business Index survey reports that about 80 percent of those who were reluctant to hire said they were afraid revenues wouldn’t increase enough to justify the expense.[8] The problem is not the availability of credit. The problem for businesses, small or large, is generating enough final sales at a profit; the need is for revenue that exceeds the expense of incurring that revenue.
You can’t have stronger sales if you don’t have stronger job creation. We will not have robust job creation until businesses are confident they can earn a good return on the investment they must make to add new workers. Employers live in a world in which they are free to invest their monies in expanding operations and hiring workers anywhere in the world, in any place they have the best opportunity to earn a superior return on investment. This is one of the legacies of the Reagan era—of having won the Cold War and having the majority of previously closed or dysfunctional governments choose prosperity as their goal rather than the economic suppression of their people. To achieve that prosperity, they need job-creating investment. To attract that investment, they provide incentives through tax and regulatory incentives and other means.
Whereas before we lived in a world of mutually assured destruction, we now live in a world of mutually assured competition. We have no choice but to create the conditions that incent businesses that operate in the United States to compete using American workers. This requires rethinking by Congress―the sole body with the power to shape our nation’s taxes and spending and write regulatory laws to condition economic activity. Our lawmakers must do so in a manner that both stimulates the desire of businesses to put Americans back to work at the earliest opportunity and provides meaningful assurance that long-term fiscal imbalances they have wrought will be brought under control, assuring the long-term viability of the U.S. economy.
Before the recent mid-term election, most all of my business contacts claimed that taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation were inhibiting the expansion of their payrolls. They felt stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit. Many felt that opportunities for earning a better and more secure return on investment are larger elsewhere than here at home.
Perhaps because I live so far outside the Beltway—among the Washington-skeptical, independent-minded people of the Eleventh Federal Reserve District—I was therefore not surprised by the outcome of the recent election. As I watched it unfold, I thought of one of the better books I had read in the summer of 1998, at the recommendation of a friend, the eminent historian David McCullough. It was titled Cod: A Biography of the Fish That Changed the World, written by Mark Kurlansky, and was considered by the New York Public Library to be “one of the 25 best books of the year.”[9]
Buried in the middle of that remarkable little book is a wonderful description of the causes of the American Revolution. Kurlansky wrote that “Massachusetts radicals sought an economic, not a social, revolution. They were not thinking of the hungry masses. … They were thinking of the right of every man to be middle-class, to be an entrepreneur, to conduct commerce and make money.” Referring to John Adams, John Hancock and John Rowe―everyone seemed to be named John in New England in those days―he posited that the revolution “was about political freedom.” “But,” he went on, “in the minds of its most hard-line revolutionaries, the New England radicals, the central expression of that freedom was the ability to make their own decisions about their own economy.” He concluded that “all revolutions are to some degree about money,” reminding the reader that, reflecting upon France’s revolution, the Comte de Mirabeau said, “In the last analysis the people will judge the Revolution by this fact alone [sic] … Are they better off? Do they have more work? And is that work better paid?”[10]
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