Why the Push for Quick Economic Fixes Is Flawed
Congressional elections are now less than a month away. But as joblessness continues unabated, politicians and even policymakers are getting increasingly panicky.
Big initiatives that can supposedly help create jobs got took center stage last week as the House of Representatives latched on to a measure aimed at China for failing to meaningfully boost the value of its currency. And some Fed officials are hinting that the further bond purchases may be necessary to knock down already-rock-bottom interest rates even further.
Despite grabbing the headlines, though, both measures are far less useful than they appear and again demonstrate the infamous short-term vision of U.S. politics and policymaking. Instead, more measured approaches in industrial policy that could actually put the country on more solid footing continue to get crowded out.
Beating up on China is a good a way to throw read meat to disgruntled voters as the number of the long-term unemployed in the country approaches record levels. But whether the measures result in job creation is another matter entirely, and not just because a slew of other countries are also working to devalue their currencies.
"Politically Inspired Vendetta"
Chinese compensation in manufacturing per hour is just 4% of what it is in the U.S., former Morgan Stanley Asia Chairman Stephen Roach recently noted. That means the impact on U.S. jobs of any currency revaluation in China would be minimal. And while China is likely to let the yuan appreciate gradually, much as it had prior to the financial crisis, it won't "buy into a politically inspired vendetta urging a massive, one-off revaluation," Roach said.
Some members of the Federal Reserve seem to be searching for the same overarching quick fix that Congress is groping in vain for. Speculation that the Fed would seek to push down interest rates further and boost demand by buying more assets spiked this week.
Of course, another push by the Fed and the accompanying brute force would probably have some short-term impact on the economy. But there's likely to be fallout from the artificially created demand as well.
A One-Size-Fits-All Approach Won't Work
Moreover, a surgical strike makes far more sense than carpet-bombing the entire economy with cash at this juncture. The chokepoints are clear: unemployment is enormously varied by factors like education and socioeconomic status. Job listings are growing at a remarkable rate, but the worker skills are lacking. Investing in retraining workers seems like a far more direct route to helping the overall economy.
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More monetary stimulus by tinkering with interest rates is a one-size-fits-all approach. Yet many parts of the economy are in far better shape than others. Even as real estate remains frayed in many parts of the country, for example, prices in Manhattan have bounced back.
Rather than soak the entire country in easy money or browbeat the Chinese, the U.S. would be much better served by a more precise and sober approach to the problem. Yes, investors would be foolhardy to believe that could happen in the next few weeks. But perhaps the prospects may rise dramatically once the elections have passed.
