Tags: Federal Reserve | tax | fiscal policy | economic growth

Sound Fiscal Policy Is Key to Future Growth

By    |   Friday, 24 October 2014 08:03 AM

America's fragile and modest recovery is showing signs of slowing, illustrating the limitations of monetary policy's impact without complementary fiscal policy. Changing the way the federal government taxes and spends to promote growth is the only policy that will set the U.S. on a path to a strong and robust economy.

Fiscal and monetary policy should complement each other. Because President Obama and his administration have not come to agreement with a divided Congress on any fiscal policy, taxing and spending have remained frozen in a Kafkaesque state for most of Obama's tenure. As a result, America has had to live with high taxes, aggressive deficit spending, steep increases in the national debt and a nightmarish regulatory environment.

Stepping into the void has been monetary policy. The inaction from the president and Congress has left a mess — mostly anti-growth policies with some temporary and minimally effective pro-growth elements. The Federal Reserve has filled the void with unilateral action — lower federal funds rates, changing bank reserve requirements and buying government bonds.

Those standard monetary actions had little positive impact on the economy. Yet the president and Congress responded with continuing inaction. Therefore, the Fed embarked on a rare and unprecedented experiment — multiple rounds of monetary stimulus of enormous magnitude. Indeed, $4.5 trillion of cheap money has propped up the U.S. economy when it needed it the most.

But it has created profound unintended consequences, as government action usually does. It has distorted the free market to value Fed policy more than economic fundamentals. It has created likely asset bubbles, especially in the equity markets. It has promoted excessive risk taking by financial institutions. It has accelerated income inequality. And the more stimulus, the more the results diminish. These are major reasons why the Fed is tapering its stimulus programs . . . not because they have met expectations but because the costs now outweigh the benefits.

Yes, the U.S. economy is improving, albeit slowly, fitfully and unevenly. Yet it is a shadow of its former self (just compare almost any statistic with 2006). The good but sad news is that America looks positively stellar compared with most of the rest of the global economy.

Is this the new normal? It does not have to be.

While we have seen the limitations of monetary policy, we have not even started to see what sound pro-growth fiscal policies could do. We elected the president and Congress to get things done and if they are serious about creating a new renaissance of American economic strength, these are some policy changes that should be considered.

Reduce government spending. There is a target-rich environment for spending cuts when the federal government spends $3.7 trillion each year. Start with small cuts that most everyone can agree to, like taxpayer dollars spent on rabbit massages, training mountain lions how to walk on a treadmill and subsidizing cupcake stores. Then tackle the big spending like reforming entitlements like Social Security, Medicare and Medicaid. Each dollar saved means less taxes needed, more money to pay down the national debt and fewer dollars wasted.

Cut taxes. With less government spending, fewer taxes are needed than the current $3 trillion that comes from individual and corporations. Reduce individual and corporate taxes to unleash productivity, boost wages and increase profitability. And then reform the tax code to become simpler, with fewer loopholes, and much easier to administer. There is no faster and better way to boost wages and increase consumer spending.

Pay down the national debt. The average interest rate on the national debt is 2.4 percent and interest payments consume 6.3 percent of the federal government's annual budget. And that is with our recent borrowing costs near zero. Imagine the budget disaster awaiting us when interest rates normalize around 4 percent to 6 percent for the current $17.9 trillion of debt. The only way this improves is when the national debt shrinks because of budget surpluses.

Trim the regulatory burden. My local dry cleaner has to comply with 3.5 linear feet of regulations, forcing them out of business and favoring the large corporations that have the time and money to comply and using their crony capitalist connections to protect their market share. Abolishing outdated regulations, simplifying others and creating a sensible compliance system can alone pump up to $2 trillion a year into helping the economy without hurting consumers and spring competition.

The only time in the Obama administration where there was agreement on fiscal policy was in the early years with a Democratic Congress. The $825 billion stimulus plan that came out of that agreement has produced mediocre results at best. Cash for Clunkers, investing in Solyndra and raising taxes have been a drag on the economy that even the Fed's $4.5 trillion stimulus plan could not counteract. And now there is growing talk of another round of Fed stimulus to prevent another stock market drop.

If we want a different result, we have to try a different strategy.

About the Author: Edmund C. Moy
Edmund C. Moy is the Chief Strategist of Fortress Gold Group and was the 38th Director of the United States Mint (2006-2011).  He can be followed on Twitter @EdmundCMoy.

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America's fragile and modest recovery is showing signs of slowing, illustrating the limitations of monetary policy's impact without complementary fiscal policy.
Federal Reserve, tax, fiscal policy, economic growth
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2014-03-24
Friday, 24 October 2014 08:03 AM
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