Thursday, March 19, 2009

The easy way out

Larry Kudlow expresses unease over the Fed's decision to introduce $1 trillion into the economy, a sentiment I share:
Of course, the Fed wants to get mortgage rates down toward 4 percent, and some on Wall Street will cheer this. However, it all has a 1970s feel to it.

The Obama budget raises tax rates on investors and businesses, and supports a cap-and-trade tax, universal health care, and various regulations for unionization. Meanwhile, a spate of trade protectionism is breaking out with Mexico and China. All of these are anti-growth policies. And now the Fed is ramping up its monetary pump-priming. So the obvious risk is too much money chasing too few goods producing a stagflationary recovery.

The dollar is out the window. Monetizing debt is back in style.
There are several ways to jump start the economy, the easiest of which is the Fed's current approach -- injecting more money and lowering the discount rate at which banks borrow money from it. There are potentially at least two significant problems with this approach. The first is that easy money promotes inflation. When everyone is suddenly flush with cash without a commensurate surge in production you can expect prices to go up. The second problem is that easy money promotes a more reckless investment climate where people throw money around willy-nilly. This helps explain the housing bubble, when credit was cheap and easy.

Low interest rates are only a good idea to the extent they are used to fund worthwhile investments. Taking out a cheap loan to fund fish farms in the Arizona desert isn't the kind of growth we need.

More broadly this strikes me as symptomatic of the overall approach the government tends to be taking these days, which is looking for the easy way out. Instead of cutting taxes and reducing spending we are spending more and borrowing what we don't have. Instead of trying to expand free trade we are kowtowing to established interests and throwing up new restrictions. Instead of reducing the regulatory burden, which many people actually benefit from (and now just lawyers), we are thinking up new ways to encumber our businesses through measures such as card check.

The thread that runs through all of these policies is the ease of their implementation. Spending money that will have to be paid by future generations is easy. Promising more government goodies is easy. Giving political payoffs to your teacher and labor constituencies is easy.

In contrast cutting spending is hard. Reforming the tax code is hard. Overhauling regulation is hard. Pushing for free trade is hard. Yet these are the steps that are most needed.

For all of his rhetoric to the contrary it is rather apparent than Obama is more interested in being popular than being bold or promoting real change.

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