The streets of our nation’s capital and its economy are both gridlocked. For the streets in D.C., it’s mounds of snow. For the economy, it’s a stalled political and monetary system.
Despite good news for businesses, the economy is sputtering and unlikely to grow much in the first quarter of this year. Last week the Labor Department reported a seasonally adjusted, annualized 6.2 percent gain in fourth-quarter nonfarm business productivity. Higher productivity is helping companies recover from the recession, but perhaps too well.
With unemployment still at 10 percent we have what is called the productivity paradox. Companies are getting much more output from smaller staffs and are reluctant to hire new workers. This dampens consumption demand and slows the economic recovery.
Despite the dramatic improvement in how well we do our work, the near-term economic outlook is dismal – both here and abroad.
Bank of England governor Mervyn King said this week that it is too early to change any of the monetary easing programs, or even rule out more of them. The employment condition in the UK remains much like ours. The Organization of Petroleum Exporting Countries also announced this week that uncertainty over the fledgling U.S. economic recovery is reducing oil demand and threatens world economic growth. Most exporting countries like those in OPEC are struggling with lackluster demand.
We know, however, that in the long run higher productivity pays off. The standard of living for any country depends on its ability to produce goods and services. When we are more proficient, we can live better. Productivity, in turn, depends on how much capital we have — both physical capital like computers and equipment, and human capital like education and skills.
But capital increases only when people, businesses and households alike are willing to invest. Political uncertainty and a lack of trust in our money men, the bankers, are holding back investment.
A high level of uncertainty over political actions, including the potential for new taxes and business regulation, is present at all levels of government. The known but disliked is sometimes preferred to the unknown. Uncertainty can often be worse for financial markets and the whole economy than any well-anticipated but bad policy.
At the federal level we have gridlock in the Senate. Republicans have stalled all major legislation this year, and according to some the Senate is broken. There is now a filibuster-proof number of Republicans in the Senate, many nominations are on hold, and unanimous consent is still needed before some tasks can even be completed. “The Senate is almost dysfunctional now," Sen. Tom Harkin of Iowa said.
At the state level, the Idaho Legislature is moving forward with a bill to ensure that no federal mandates on health insurance make their way here. As reported in the Statesman, the Idaho House passed a bill Tuesday that would excuse Idahoans from proposed federal requirements to buy health insurance. Even if Congress does get around to passing some new health initiative, it is very hard to know its effect on business here or in other states.
A bigger question at the Statehouse right now is how the Legislature will meet Gov. Butch Otter’s call for cutting expenses. Superintendent of Public Instruction Tom Luna is proposing the use of reserve funds to cover some of the anticipated cuts in education spending. This can be good for Idaho students and educators but costly in the longer term. With a weak economic outlook it is difficult to know when, if ever, the fund can be replenished.
So the debate continues as to what policymakers should do to get the economy moving again. Yes, we had an economic stimulus bill, but the primary policy tools since the start of the recession have been lower interest rates and greater money creation.
As many have argued, the easy monetary policy may have averted a disaster, but the money men continue to push on string.
In his 2006 book, "The Money Men: Capitalism, Democracy, and the Hundred Years' War Over the American Dollar," historian H.W. Brands tells the story of how frequently we argue over what constitutes money, how easy it should be to produce money, and who gets to decide when we should. He argues that this question dominated politics from the founding of our nation until the creation of the Federal Reserve in 1913.
The war over the American dollar is far from over. The question of who will be our top money man and what he should be allowed to do dominates politics today.
Many U.S. senators voted against Ben Bernanke continuing as chairman of the U.S. Federal Reserve. The 30 votes against him were the most ever, and the stock market is more than 5 percent lower since his confirmation last month.
In testimony before Congress this week, Chairman Bernanke outlined the new approach the bank is planning to use to control inflation that is picking up. Bernanke said the Fed can raise the interest rate paid to banks on their reserves held at the Fed in excess of requirements. This would give banks an incentive to leave more funds with the Fed instead of lending to businesses or consumers, thereby restraining inflation.
But excess reserves remain the problem, not a potential solution. Excess reserves in U.S. banks currently stand at more than $1 trillion, down only slightly from their peak of $1.1 trillion at the start of the year and 39 percent higher than a year ago.
The other money men are not parting with their money. Banks are still not lending to businesses for new investment.
Adam Cotterell reported for Boise State Radio this week that many banks remain reluctant to lend. Instead they are using new money to improve their capital base. Local banks reported that regulators are telling them to slow lending, cut expenses, and hold on to more cash.
These bankers would like to be lending more but are receiving mixed signals. The federal government may be planning to give more money to local banks, as President Obama has proposed by taxing larger banks, but most of this money will go to shoring up capital just as the federal regulators are requesting, not to new loans.
Thus, the gridlock remains. We can’t expect businesses to stop the efforts aimed at improving the productivity of their employees and simply start hiring more workers. Rehires or new hires will occur only if there is opportunity for new investment.
Consequently, investment will increase only if the money men can loosen the purse strings. But neither businesses nor bankers are likely to move at all until the politics are settled.
We will have to wait for the streets to be cleared in D.C.
Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.