This morning, Fed Chairman Ben Bernanke said something we agree with for a change: that it's really up to elected officials to initiate policy changes if they want to "do something" for the economy.
In their spin on the Fed Chairman's remarks, NPR presumed to speak for "investors" whom they described as "waiting breathlessly" in hopes that the Fed was going to ride to the rescue with more "solutions" to the present state of the economy.
While NPR announcers may be very good at their job, we question their ability to speak for investors. As professional investors with decades of daily experience analyzing the economic situation and businesses in the economy, we would like to point out that these announcers certainly do not speak for us.
The NPR commentary this morning began:
Nervous investors -- and these days that's most investors -- were all ears this morning as Federal Reserve Chairman Ben Bernanke delivered a speech in Wyoming. The investors were listening for any clues about additional steps the Fed might take to shore up the sagging economy. Bernanke did not outline any big rescue plans, but he did say the Fed has tools it can use if necessary.Later, the back-and-forth between two commentators included this exchange:
David: So, investors were waiting for this breathlessly. Why all the buildup?We've already published a series of posts which explain that "bold action" from the Fed is not what investors -- or anyone else who cares about economic growth -- should be pining for. To suggest that the Fed's negative assessment of the economic conditions could be a "silver lining" that will lead to "some bolder action" (such as QE3) in the near future is quite troubling, and demonstrates a clear bias towards Keynesian economic views by those running taxpayer-supported NPR.
Scott: Well, precisely it's because the economy has been in such a slump, David. You know growth in jobs has slowed dramatically since the beginning of the year, we've seen signs that factories are losing steam. Just this morning the Commerce Department came out with a revision of it's economic growth numbers for the second quarter, showing that the economy grew at just one percent, barely above stall speed, and so there's a lot of interest in what the Fed, or anybody, can do to try to come to the rescue.
David: And I gather Bernanke did not have as much to say as some investors would have liked. Tell us what he included in the speech.
Scott: Well, there was very little specific, in terms of what the Fed is prepared to do, there was no grand new silver bullet unveiled, nothing for investors to really grab onto as a strong dose of economic medicine. But as you say, Bernanke did again reiterate that the Fed has tools in its tool kit that it is prepared to employ as appropriate to support a stronger economic recovery. He also acknowledged that the weakness of the recovery is not just a result of some of the temporary factors that we were talking about this spring, the Japanese tsunami and the disruption in supply chains that caused, or the higher oil prices that resulted from the Arab spring. Bernanke said there are more persistent drags at work on the economy, so I guess if you want to look for a silver lining, that negative assessment of the problem could indicate some willingness in the future for the Fed to take some action. Bernanke said Fed leaders will be looking more closely at this when they meet again next month.
David: But Scott, a year ago -- I believe in the very spot, in Jackson Hole -- the Fed seemed ready and took some bolder action. If we're talking about "persistent drags" on the economy now, as you put it, what's changed? Why not take bold action today?
Contrary to what the NPR commentators say when they presume to speak for investors, we are not looking for a "silver bullet" from the Fed, or a "strong dose of economic medicine" for investors to "really grab onto." Indeed, we think that those who can read between the lines of the above commentary will perceive that there are some other "persistent drags" holding the economy back, and we would include the effects of QE2, and all the other so-called forms of "government stimulus" among the drags!
We believe the Fed Chairman is right to have said that the real problem and solution lies with the elected officials. However, while some will interpret that as a call for some kind of short-term stimulus to the consumer, we would argue that government attempts to throw money at the consumer do not create a sustainable economic recovery. Companies do not hire more workers just because of temporary consumer stimulus -- they hire more workers based on their outlook for long-term business conditions, which can be improved primarily by removing obstacles to growth, including obstacles that make hiring workers or increasing profits more expensive.
If elected officials really want to take "bold action" to get the economy growing faster, they should consider actions such as replacing our byzantine tax code with a flat tax, lowering or eliminating the corporate tax rate in the US, repealing regulations that make healthcare more expensive for employers, replacing welfare payments with a negative income tax, signing free trade agreements (some of which, such as the agreement with Columbia, have been stalled for years), and repealing unnecessary regulations such as Sarbanes-Oxley, and even the recently passed Dodd-Frank financial reform bill.
We do not make these suggestions as representative of one political party or another -- we are speaking on behalf of investors, and for policies that we believe are good for overall economic growth, innovation, and the investors whose capital fuels that growth and innovation. After all, we actually are investors and professionally represent investors.
Finally, we would like to point out the fact that economic growth of 1%, while anemic, does not indicate an impending crisis. The commentators in the NPR clip above imply that 1% growth is "just above stall speed," as if an economy that does not grow fast enough will automatically stall, in the same way that an airplane that does not go fast enough will stall. But that is a false analogy. Airplane engines require a certain amount of speed in order to force air into the engine, but there is no law of physics or of economics that says that a country must grow at a certain speed or else it will simply "stall" and go into a recession.
This view comes from the idea that economies are fragile things that will naturally break down unless they are constantly tinkered with and stimulated by governments. In fact, economic activity is the natural state of human affairs. Left to themselves, people will grow crops, start businesses, invent solutions to problems, look for cures to diseases, and generally "do economic activity" that will enable them to make money for their families in greater and greater amounts. It is government tinkering and interference that disrupts this natural pattern. Thus, the cure for the sluggish 1% growth is not more stimulus but rather removal of some of the "persistent drags" that we talked about above.
In summary, the NPR story above is full of very poisonous ideas, all pleasantly masked by congenial banter between likable reporters with sophisticated diction. Investors should be wary when listening to such stories, which imply that the writers are accurately reporting the sentiments of investors at large. In fact, nothing could be further from the truth.
