Robert Rubin, President Clinton’s Secretary of the Treasury from 1995 to 1999, wrote in yesterday’s Wall Street Journal that we are putting too much reliance on monetary policy in our search for economic growth: “Monetary policy is important, but it is not omnipotent.”
According to Mr. Rubin, the focus on monetary policy takes
“attention away from elected officials’ failure to act on the fiscal, public-investment and structural issues that are the key to short- and long-term economic success. [F]ocusing on central banks reduces public pressure on elected officials to act.”
I agree with Mr. Rubin that we are asking too much of monetary policy, i.e., the Federal Reserve, and that the political branches, i.e., Congress and the President, need to do more. Where I disagree with Mr. Rubin is in what Congress and the President need to do.
“In the U.S., that agenda should include a sound and well-constructed fiscal regime, robust public investment, and structural change in areas like immigration, education, trade liberalization and much else. The fiscal regime should consist of upfront job-creating infrastructure spending, enacted simultaneously with somewhat deferred structural fiscal-discipline measures on the spending and revenue sides.”
I agree that trade liberalization is important and that a better immigration policy would help, too. A suggestion on immigration: If we can’t pass a perfect bill (i.e., a comprehensive one), we should do it piecemeal. Pass what we can now and do more later. I don’t think, though, the Democrats want to do that. The only way they can stay united is to pass a bill with something for everyone. If the measures are voted on separately, the Democrats run the risk of losing their unity, which they don’t want to let happen.
When it comes to “robust public investment” and “job-creating infrastructure spending,” the problem is that these can turn into wasteful pork so easily. As I am sure Mr. Rubin would agree, there is a difference between real investment and mere spending. He obviously has a greater confidence than I do in government’s ability to tell the difference – and build the stuff that will make a difference – as opposed to just helping some public official get re-elected.
Also, Mr. Rubin seems to miss the need to protect our business climate and to keep the rules on running a business flexible. One of the advantages the U.S. economy has had over those in Europe is flexibility. Flexibility in hiring and firing. Flexibility in setting up – and shutting down – a business. Fewer rules. Less unnecessary bureaucracy. The Economist explained last July:
“Red tape is a mounting problem for American business. …
A new survey by Thumbtack, an online marketplace, and the Kauffman Foundation, a think-tank, reveals that small businesses feel more overregulated than overtaxed. Two-thirds of respondents said they paid a ‘fair share’ of taxes; few had such a rosy view of red tape. …
Overall, the evidence is clear that too much red tape retards growth. …
Hacking away at red tape is a cheaper way to create jobs. … Leviathan’s tentacles are strangling economic growth, and cutting some of them back would be a cheap way to promote it.”
Unfortunately, the Obama administration seems to be going in the opposite direction. Our labor markets are still more flexible than those in Europe, but they are not as good as they used to be, and they would become even less flexible if the Administration has its way.
Finally, while Mr. Rubin does see the need for “structural fiscal-discipline measures on the spending and revenue sides,” the problem is he thinks they can be “somewhat deferred.” I am sure Mr. Rubin really does want such measures in the future. However, I don’t have as much confidence as he apparently does that any future president or congress will actually implement them.
Overall, Mr. Rubin is right, that we shouldn’t rely too much on monetary policy. He is less right when he talks about what we should do instead.
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