The consequences of Central Bank inaction
Monetary economist Adam Posen's speech (pdf) counseling more aggressive action from central banks is worth reading in full, but people should pay particular attention to this part:
Periods of persistently sub-potential growth and underemployed resources erode political moderation and the liberal governments we also must pass on to future generations. Let us not forget that it was sustained high employment and austerity, the sense that governments were unresponsive to average people’s dire economic conditions, which led to the rise of extremist intolerant parties in pre-war Europe. As we have seen sparks of late, thankfully limited, it can also lead to less liberal economic relations between nations, or even trade wars.
Posen is speaking to a European audience, but let's talk about America. In 1999, only 30 percent believed free trade had hurt America. In 2007, that had risen to 46 percent. Now, it's at 53 percent -- a solid majority. And among two of the most politically active constituencies -- tea parties and unions -- that sentiment passes the 60 percent threshold. If things continue to not get better, it'll rise further, and you'll increasingly see the political system respond.
In fact, you already are. In the House, a bill slapping tariffs on China passed with an overwhelming majority. In the Senate, Democrats abandoned a vote on the Bush tax cuts to push anti-outsourcing legislation giving companies a tax break if they fired foreign workers and hired American workers. That bill, they figured, would be the most popular item they could push in the weeks before the midterms.
The Federal Reserve appears to believe that the downside of slow growth is nothing more than slow growth. So long as the numbers are pointed in the right direction, getting back to trend slowly isn't much of an emergency. They may want to rethink that view. Among the problems with slow growth, Posen warns, is its potential to spark "a political reaction that could undermine our long-run stability and prosperity." And though there's a lot the Federal Reserve can do to fix our economic problems, there's much less it can do to fix our political problems.
Photo credit: Joshua Roberts/Bloomberg.
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