Believe it or not, U.S. presidents and the Federal Reserve Bank neither create nor destroy U.S. jobs. Sure, they can set tax rates and borrowing rates and channel funding to various institutions, but they do not — Republican or Democrat, Bernanke or other — dictate the ebbs and flows of our economy.
Fiscal and monetary policy tools are merely flexible barriers meant to resist the 10-ton pendulum that is the economy from swinging too far this way or that. To complicate matters further, measuring with any degree of accuracy the efficacy of fiscal or monetary policy on the economy is far from straightforward.
Fiscal policy is spending and taxation at the government level. Monetary policy is the adjustment of interest rates to achieve the Federal Reserve’s dual mandate of maximum employment and price stability.
These are the two arms of economic policy in the U.S. Although expansionary and contractionary policies of this flavor shape the incentive structure for households and firms, they do not directly dictate behavior.
That is, government and central bank policy determine tax and interest rates but not tax revenue or investment. For instance, the federal government may impose a corporate income tax rate of 35 percent, but that rate does not establish the amount of profit or loss incurred by a firm in any given year.
Consider the following analogy, which I think is useful for understanding this rather nuanced issue given the current economic and political environment:
Suppose a driver in a car is traversing hilly terrain with persistent up and downhill sections. To maintain a constant speed, a skilled driver will depress the accelerator along the uphill portions and raise his foot from it and depress the brake on the downhill sections.
In this example, the car is the economy, the hills symbolize the inherent business cycles the economy undergoes over time and the gas and brake pedals represent the amount of expansionary or contractionary policy pursued, fiscal or monetary.
An acute observer will recognize that if one attempts to ascertain the relationship between speed of the car and the action of the gas pedal, none will be found.
This insight is immediately applicable to the question of whether expansionary policies implemented over the previous three-plus years have had any effect on the economy. As illustrated above, one simply cannot identify or quantify the impact with any reasonable degree of confidence.
Moreover, this issue is further complicated by the ubiquitous counter-factual. We will never know with certainty what would have happened to the economy had the federal government and the Federal Reserve Bank not intervened to stabilize markets.
To be sure, however, 95 percent of polled economists think the recession would have been deeper and more prolonged in the absence of federal government and central bank stimulus.
I am irked, but not surprised, by the lack of circumspect approaches to understanding how something as complex as the economy functions in the real world. After all, the economy is shaped by the interaction of myriad individuals and firms making decisions today based on their varied expectations of the future.
Indeed, economists debate routinely over how policy prescription will influence markets, and we spend our lives attempting to develop a deeper understanding. Yet, we still, to a significant extent, disagree over these issues.
It has been fashionable of late for policy officials and the public at large to infuse an air of omniscience over what’s best for the economy and how one must go about achieving its growth.
As the great philosopher Hannah Arendt put it, “Predictions of the future are never anything but projections of present automatic processes and procedures, that is, of occurrences that are likely to come to pass if men do not act and if nothing unexpected happens; every action, for better or worse, and every accident necessarily destroys the whole pattern in whose frame the prediction moves and where it finds its evidence.” Try as we might, the government and central bank do not control our economy.
Dr. Nicholas J. Mangee is an assistant professor of economics at Armstrong Atlantic State University and can be reached at Nicholas.mangee@armstrong.edu.