Much discussion of the US Federal Reserve rate rise this week centred on whether the US economy really is strong enough to handle tighter monetary policy.
Fed board members want to see more rate rises in 2017 but they have not noticeably lifted their projections for economic growth.
How can that be? There is no way they’d increase borrowing costs if they thought it would tip the economy back into stagnation.
To understand the decision we need to turn that question around. It’s not ‘is the economy strong enough?’, but more ‘is loose monetary policy making it stronger?’.
The answer to that second question is ‘yes and no’.
‘Yes’, economic growth has gradually returned during the post-GFC super-low interest rate period.
And, ‘no’, a lot of that growth is not what American workers see as a step forward.
The Trump presidential election victory was the political expression of a very wide economic malaise.
America’s previously prosperous middle-class has been hollowed out – first by the ravaging of their assets during the GFC, and secondly by the replacement of well-paid jobs with subsidence roles that in many cases can’t pay the bills.
The Fed committee that sets interest rates made an oblique reference to this in its rates announcement: “Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft.”
Let’s unpack the three elements listed there.
‘Job gains’ does not describe the quality of the jobs on offer, just the number of people no longer included in the headline unemployment rate – a number that, as in Australia, overlooks huge numbers of under-employed people.
‘Household spending’ may be rising moderately, but what it didn’t say is that US consumers have just started doing something they haven’t done since the GFC – drawing down equity in their homes and spending it as ‘income’.
And if ‘business fixed investment’ is ‘soft’, the jobs being created are disproportionately ‘tick-over’ jobs – not true wealth creators. When an engineer or accountant takes a job on the floor of Wal-Mart to make ends meet, the economy is far from a happy place.
Wrong lever, stupid
So loose monetary policy, hailed by some as the saviour of the US economy, is no silver bullet.
In fact, as Bill Mitchell, economics professor at the University of Newcastle, reminded me this week, over-reliance on monetary policy is jeopardising the recovery.
Why? Because policy makers around the world have used loose monetary policy as an excuse to not consider that other main lever of economic management – fiscal policy.
When an economy has a lot of spare productive capacity – particularly high under-employment – governments have two options.
They can wait for the private sector to borrow at super-low interest rates, invest in high value-adding enterprises, and create the high-skill, high-wage jobs that define ‘developed’ nations.
Or, when they realise that’s not happening, they can step in and borrow-and-spend themselves.
Now if they did that by opening their own Wal-Marts, that would be a disaster.
But if they do that to build infrastructure that will help future businesses grow, they are solving two problems – creating jobs and improving the efficiency of the economy overall.
That is what the OECD, the IMF and dozens of think tanks around the world have been calling for advanced economies to do more of over the past few years.
So why haven’t politicians and public servants done so?
The answer is politics: a ludicrous, factually wrong, and economically damaging story has been developed by political opportunists, suggesting that it is somehow harmful for governments to borrow and spend in this way.
In Australia, nobody did more to spread that fallacy than the Coalition leadership team of Tony Abbott.
They, and ideological backers in the national media, steadily created the myth that governments should aim to have no net debt – something John Howard achieved with the embarrassment of riches delivered by the first phase of the mining boom.
That myth is finally being debunked.
As the Trump revolution showed, voters are sick of waiting for low interest rates alone to save them.
The Federal Reserve board members are now adding their voices to that movement. They’re effectively saying ‘don’t blame interest rates for the economic malaise – get off your butt and do something’.
And that political earthquake is being felt in Australia too.
Who’d have thought that little more than a year after the collapse of the Abbott leadership team, that Treasurer Scott Morrison would be using the words “good debt” in relation to infrastructure spending.
Yep, he said it. And about time too.