Fed’s Low Interest Rates Enable Washington’s Dysfunctions

Peter Morici
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Posted: Oct 14, 2014 12:01 AM
Fed’s Low Interest Rates Enable Washington’s Dysfunctions

The U.S. economy is underperforming, and the Federal Reserve’s low interest rate policies won’t reinvigorate it.

To cope with the financial crisis, President Obama pulled out all the stops—record deficits, bank and automaker bailouts, and sweeping financial reform—but since the summer of 2009, GDP has advanced only 2.2 percent annually. One out of six men ages 25 to 54 remain jobless, wages are stagnant and family incomes continue to fall.

History dealt Ronald Reagan a tough hand too—he endured double digit inflation, interest rates and unemployment. Yet, his recovery accomplished 4.7 percent growth, vigorous jobs creation and a robust prosperity.

America once boasted the most productive manufacturing and R&D on the planet but for some time now, CEOs have been underinvesting at home and moving plants and product development to China and other foreign locations.

Nowadays, many young people can’t start a decent career, are burdened with too much college debt and are postponing marriage and children. More elderly are bagging groceries and busing tables, because they can’t get a decent return on savings and many have lost pensions.

University presidents have been overinvesting in football, covering up the criminal activities of athletes and coaches, and short-funding science and engineering. They push students into cheap to staff majors in the social sciences and humanities, where disaffected faculty often cultivate cynicism about traditional American values like hard work, personal responsibility and thrift, and students acquire too few marketable skills.

U.S. productivity growth has slowed to a historically anemic 1 percent a year, while over in China the pace is about 5 to 6 percent!

Continuing this way, federal revenues will soon be inadequate. Budget deficits will rise precipitously early in the next of the decade, and then spin out of control and become tough to finance. Washington will not able to simultaneously fund Social Security and Medicare, the wider social safety net, the normal operations of government, and a military adequate to defend against terrorism.

Support for democratic institutions will fray and then disassemble, and America could become a darker, unrecognizable place.

The culprits are all around us.

Corporate taxes at 35 percent are too high and government regulations are too burdensome, unless a business can find a politician to put in a fix.

For example, the Treasury recently ruled that transmission wires are now “real estate” for tax purposes, permitting telecom companies much lower rates under the tax code. That will benefit Comcast, whose CEO provides his home to the president for frequent fund raisers.

The U.S. dollar is terribly overvalued against China’s yuan thanks to Beijing’s capital controls and currency market intervention. This makes Chinese products artificially cheap at Walmart and sends American factory jobs to China.

Obama admits the problem but confronting Beijing would upset New York bankers who are also big contributors to the Democratic machine. Instead, he spends his political energy trying to close Guantanamo and bring its terrorist inmates onto U.S. soil.

Since the financial crisis began, the Fed has pumped trillions of dollars into financial markets to keep interest rates low and propagated the myth that a healthy dose of inflation could get the economy growing quickly again, but it has produced little evidence that inflation could fix the dysfunctions besetting American capitalism.

Low interest rates have pushed up auto and home sales and stock prices to give the president and congress just enough growth and political cover to avoid addressing the big, tough structural problems. But anyone with a nose can smell the stench of decay.

Only by ending its easy money policies could the Fed stop enabling Washington’s irresponsible behavior and help force political change. And if the Fed doesn’t act soon, it may simply be too late.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a national columnist.