Does anyone have a clue how government policy affects the economy?

Raymond Keating
Raymond Keating

Does anyone in a position of power in our nation’s capital have a clue as to how policy actually affects the economy?

Contrary to economic common sense and what we’ve learned from history, President Barack Obama continues to push more and more regulation, higher taxes and a generally activist government. This is somehow supposed to be good for small businesses and the economy.

What about Congress? Well, House Republicans largely seem to get it. After all, they’ve been rather active in trying to rein in a government careening out of control. For good measure, House Speaker Paul Ryan understands pro-growth policymaking and has been pushing for tax and regulatory reforms. Unfortunately, the Senate for the most part lacks the votes to pass what the House has approved on matters like reining in regulatory abuses. And then, of course, there’s the president’s veto pen.

Then we have the Federal Reserve. Again, relying on economic common sense and the lessons of history, we know the Fed works best when exclusively focused on maintaining price stability, which in turn is foundational for investment and economic growth. However, since the financial meltdown that started in late summer 2008, the Fed has been on a misguided crusade in thinking loose money without historical precedence can drive the economy forward.

Indeed, the Fed continued fooling itself in the latest Federal Open Market Committee statement on monetary policy released Sept. 21. For example, it was noted in the statement: “Information received since the Federal Open Market Committee met in July indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year.”

Excuse me, but “modest pace?” Gross domestic product grew in the first quarter at a pathetic annualized rate of 0.8 percent and in the second quarter at only 1.1 percent. By the way, in the fourth quarter of last year, growth came in at a mere 0.9 percent. If only growth had been “modest” recently.

As for monetary policy, there’s a great deal of angst about whether or not the Fed will raise the federal funds rate by a tiny amount from its current ridiculously low range of 0.25 to 0.5 percent. The entire debate is beyond preposterous. Quite simply, as noted in the FOMC statement, the Fed plans to keep monetary policy “accommodative.” That is, loose money will continue for the foreseeable future. A fed funds rate at 0.5 percent or 1 percent matters not. The Fed’s continued loose money won’t help the economy. Contrary to what the Fed has assumed, the monetary policy stance of the last eight years has only added to the many uncertainties restraining investment, business growth and economic expansion.

It also was asserted in the FOMC statement: “The committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further.” Might the economy actually grow at a “moderate pace?”

The FOMC provided an answer in its latest economic projections, also released Sept. 21. Those numbers tell a story of continued gross underperformance by the U.S. economy. For example, the range for real GDP growth runs at 1.7 percent to 2 percent for 2016, 1.6 percent to 2.5 percent for 2017, 1.5 percent to 2.3 percent for 2018, 1.6 percent to 2.2 percent for 2019 and between 1.6 percent to 2.2 percent over the longer run.

Keep in mind that over the past six decades, real annual GDP growth has averaged 3.1 percent. During periods of economic recovery and expansion, real growth averaged 4.3 percent.

The Fed offers a dismal outlook. But if policymaking continues to be pointed in the direction of more regulation, higher taxes, bigger government, misdirected monetary policy and either no U.S. leadership on advancing free trade or outright protectionism, these sad FOMC economic growth projections could turn out rather optimistic.

Considering we’ve suffered through one of the deepest recessions on record and one of the worst economic recovery and expansion periods, the president and Fed have been proven dead wrong in their assumptions. The U.S. desperately needs a dramatic change in policy direction.