Monetary Policy

Market independence or business as usual?


Tax and Fiscal Policy
Following the Democratic rout in the American mid-term elections, defenders of limited government will wonder whether a Republican-led Congress will govern according to constitutional principles or merely exchange party labels in the game of crony capitalism. For nineteenth-century journalist Frédéric Bastiat, the latter course was more often pursued; distrustful of unscrupulous politicians who, regardless of party, use the spoils of office to aggrandise themselves and their followers, he disparaged the aims of politics:

The State is the great fiction through which everybody endeavors to live at the expense of everybody else.’

Politicians of one party come to power on the illusory promise of ‘much gain, little pain’. Yet whether they engage in redistribution or monetary legerdemain, they cannot rewrite natural economic laws that favour free markets, private property and sound currency. Unable to satisfy their campaign promises, their electoral clientele turn elsewhere for emolument.

And this is what other candidates for office are waiting for. They exploit the same illusion, follow the same course, obtain the same success, and are soon swallowed up in the same abyss.’

During the mid-terms, GOP contenders presented themselves as the ‘unObama’ candidates, availing themselves of the President’s dismal record of domestic (and foreign policy) accomplishments; while the Democrats, in response, were keen to emphasise the absence of a positive Republican governing programme, thus eviscerating a mandate for budgetary austerity. Opprobrium was levelled at both parties for skirting the edges of that abyss.

No matter who won, prospects were grim — a national debt approaching $18 trillion (105 per cent of GDP), a deficit of nearly $500 billion, and anaemic growth. Adherence to free market principles and limited government are prerequisites for a turn-around, but special-interest group affiliations mar both parties. In his time, Bastiat had outlined the invidious political choice:

‘[W]hen plunder is organised by law for the profit of those who make the law, all the plundered classes try somehow to enter … into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: either they may wish to stop lawful plunder, or they may wish to share in it.’

Both parties must buck this cynicism. The Republican leaders of the Senate and the House submitted their own list of priorities, ‘by focusing, first, on jobs and the economy’, promising more bi-partisanship and bills to revise the tax code, regulation, and over-government, among others. Yet the impression is one of mere tinkering and not the sort of wholesale reform that has led other countries to economic strength.

Another way forward for the GOP may be through the constitutionalists who, looking to American history for inspiration, style themselves a ‘Tea Party’ caucus. Its objective of limited government is based largely on an appeal to the Tenth Amendment, which prohibits the federal government from jurisdictions reserved to the states and the people, and prescribes it to its enumerated powers. Coinage is one such power (Art. I, §§ 8, 10), whose literal and figurative debasement has drawn the ire of all who disparage the evils of fiat money and hope for immediate reform. For Republicans’ first act, ‘I’d start with “Audit the Fed”,’ offers New York essayist Seth Lipsky:

‘The Republican sweep offers the new Congress a chance to do a lot of good things, but none is more timely or strategic than monetary reform. Of all the things the Democratic Senate was getting in the way of, it’s the most important.’

And none too soon. Despite illusions to the contrary, the short-term fate of the American economy will be under greater scrutiny with the ending of $3.5 trillion worth of quantitative easing by the Federal Reserve in late October; a necessary first step towards equilibrium, as von Mises and Hayek taught, but with much turmoil likely to follow.

For instance, what can account for the depressed nature of Keynes’s ‘animal spirits’, as US growth remains below usual post-recession recovery figures? Roger Koppl gives an answer. ‘Interventionist policies create uncertainty, raise the costs of financial intermediation and discourage investment. I might almost say that the problem is not that the government has done too little, but that it has done too much,’ he writes in From Crisis to Confidence. ‘The problem, however, is not the level of government spending. The problem is changing rules, uncertain regulations, shifting Fed policy. The problem is the variability and unpredictability of government economic policy.’

Lipsky expands on the ill-consequences of the Fed’s foray into fiscal matters:

‘Employment issues are properly the concern of Congress and the president, who between them control the taxes and regulations that help or harm job-creation. Passing the ball to the Fed has allowed them to dodge responsibility.

‘Perhaps worse, it has encouraged the Fed to intervene in the economy in ways that inevitably help some Americans at great cost to others.

‘Fed action since 2008 has kept the stock market, Wall Street and the big banks happy — at the price of stagnation for the “99 percent”. All without bringing us a hair closer to “full employment”.’

Nevertheless, with Republicans in control of both chambers of Congress, American business may take heart and, with QE and White House meddling at an apparent stalemate, begin to invest in new production activities once more — the natural and sustainable route to employment opportunity. Will this begin the period of inflation long awaited by conservative economists, as banks release reserves to fuel this growth? Or will the Fed raise interest rates in an attempt to avert this unstable boom and return an anxious America to bust? The United States remains in the realm of economic uncertainty, with the question of ‘market independence’ or Bastiat’s ‘business as usual’ still to be resolved.

Stephen Michael MacLean tweets as @OrganicTory