Quantitative easing is the Fed’s version of “stimulus,” the complement to fiscal stimulus. The trouble with all forms of temporary spending is that they have no permanent effects. They delay needed adjustments in the economy.
Today’s state and local governments are a case in point. Municipal and state spending was propped up by federal transfers of many billions of dollars in the president’s 2009 stimulus package. But as this federal money has dried up, public payrolls are declining, ironically enough for this administration, close to the presidential election. President Obama received bad advice when he was told that government spending would prime the pump of the economy. Instead it had the effect of temporarily transferring resources from the productive private sector to a bloated public sector.
The Fed’s version of temporary stimulus will likely involve purchasing government bonds. If past is prologue, this will act as a sugar rush to financial markets. There will be equity- and bond-market rallies. Wall Street will rejoice, but none of this will translate into “substantial and sustainable” economic growth, the FOMC’s stated goal….
What would stir the spirits of investors and employers would be some policy certainty, reining-in of out-of-control government spending, stopping ill-advised regulations, and clearing the air of antibusiness rhetoric. No repeat of a one-off round of bond buying by the Fed substitutes for the fundamental and permanent changes needed.
Featuring Dan Ikenson, Director, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute; Simon Lester, Policy Analyst, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute; Daniel Pearson, Senior Fellow, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute; and Bill Watson, Policy Analyst, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute.
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In this issue of the Cato Journal, economists Geoffrey Black, D. Allen Dalton, Samia Islam, and Aaron Batteen offer one prominent example of allowing the market to work. Also in this issue, economists Jason E. Taylor and Jerry L. Taylor reexamine the relationship between marginal tax rates and U.S. growth, and Robert Krol looks at bias in CBO and OMB economic forecasts.
The 2008-2009 financial crisis and Great Recession have vastly increased the power and scope of the Federal Reserve, and radically changed the financial landscape. This new ebook examines those changes and considers how the links between money, markets, and government may evolve in the future.