It’s a big day for Federal Reserve Chairman Ben S. Bernanke. In a much-anticipated speech in Jackson Hole, Wyoming, he will try to reassure the world that the U.S. has the tools and the political will to rescue a rapidly deteriorating economy.
The recent turmoil in financial markets reflects a harsh reality: The global recovery is faltering, and central bankers are severely limited in their ability to help. In the U.S., consumer sentiment has fallen to its lowest point in almost three decades -- lower, even, than in the scary months after the September 2008 collapse of Lehman Brothers Inc. The latest manufacturing surveys point toward recession. The Fed has already taken interest rates as low as they can go and promised to keep them there through mid-2013. Stimulus, meanwhile, has become Washington’s newest third rail.
Markets expect Bernanke to signal his readiness to intervene. The main hope is for a third round of quantitative easing, in which the Fed would either buy more government bonds or shift existing holdings toward longer-term securities.
The odds of success are long. Quantitative easing is supposed to help the economy three ways: By weakening the dollar, it makes U.S. exports more competitive; by lowering interest rates, it boosts the housing market and allows owners to cut mortgage payments or borrow more; and by pushing investors into riskier assets such as stocks, it prompts a rise in the stock market that puts consumers in a mood to spend more.
The first channel, exports, might work but the others are clogged. Many mortgage borrowers can’t refinance. Ephemeral stock gains won’t do much to improve the national disposition. Investors might choose commodities over stocks, adding to a rise in food and fuel prices that would weigh on consumers. For some of these reasons, analysts at Goldman Sachs estimate that the economic impact of a QE3 would be almost 40 percent smaller than the effect of its predecessors.
There are also larger questions regarding monetary stimulus. Does the Fed really want to encourage people to borrow more and take on more risk when they’re still struggling with too much debt and when troubles in Europe threaten to slam stock markets? And does the Fed really want to keep punishing savers, especially older Americans who depend on safe, fixed-income investments that have been yielding close to zero for two years, largely to the benefit of bankers?
With the Fed’s options limited, the responsibility for fending off another painful recession falls on the federal government. While the Fed can only print money, the government has the power to create jobs directly. And jobs are what the economy needs now, to break the chain in which high unemployment, weak consumer demand and low business confidence reinforce one another. Bloomberg View has laid out some of the best options available for a national jobs policy:
-- Public-works spending can lift demand and put people to work in capital-intensive industries such as construction.
-- A tax credit for companies that increase their headcount can encourage hesitant employers to hire at minimal cost to taxpayers.
-- Programs that pay the wages of new hires as they gain on-the-job training can efficiently target the long-term unemployed.
-- Allowing the unemployed to collect benefits while starting up new businesses can prompt older, better-educated people to create their own opportunities.
-- For some entry-level jobs, scrapping the reporting of criminal records on applications can help qualified workers get a foot in the door and stay out of prison.
-- And to make the spending more palatable to congressional opponents, President Barack Obama could offer to cut some of the red tape holding back hiring and economic growth, such as the outdated Davis-Bacon Act, which artificially raises the cost of public-works projects.
Altogether, a meaningful jobs package might cost taxpayers more than $200 billion over a couple years. To provide the government the leeway it needs to support the economy in the short term, it’s crucial that the congressional supercommittee, which must find $1.5 trillion in deficit reduction over the next 10 years, recommend a combination of new revenue, spending cuts, tax reforms and entitlement changes that would put the government’s long-term finances on a sustainable path.
Whatever Bernanke says today, he can’t rescue the economy alone. Nor should he try. America’s best hope of avoiding a Japan-like fate of mounting debt and decades of stagnation is a national jobs policy, one whose coordination falls, for better or worse, squarely on the shoulders of the federal government.
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