By now you have probably heard that the latest employment report suggests that jobs growth is slowing. My best guess is that this is a signal that the economy is reverting to a more sustainable rate of growth, rather than anything more drastic.
But what if I’m wrong?
It’s possible that the economy is slowing significantly — that Friday’s jobs report is the canary in the coal mine. Perhaps employment is slowing because of election-related anxiety, or Fed-induced fears of higher interest rates, or concerns about the world economy. Maybe the recovery has run its course.
Whatever it is, I find it hard to think of a time in recent American history when policy makers are as ill-prepared to respond.
The Federal Reserve still has interest rates set nearly as low as they will go. This means it can’t use its standard tool of cutting rates to stimulate the economy.
Typically, that would suggest turning to fiscal stimulus. But the odds of a timely stimulus are slim. Though it’s only early June, Washington is already gripped by election fever, and Congress has decided to punt on just about every major issue until after the election.
As a result, fiscal policy will most likely be delayed at least until a new administration takes office in early 2017. And who knows what the priorities of the new president might be?
Add in the usual lags in recognizing the downturn and then passing and ultimately carrying out fiscal policy, and it seems unlikely that an economic slowdown will generate much of a policy response for nearly a year.
If the economy falters, perhaps the Federal Reserve will return to a policy of quantitative easing. But this would require a major shift in thinking, as the Fed now seems impatient to return to more normal interest rates. I’m doubtful that the Fed has any desire to reverse course soon, and particularly not in the run-up to an election.
After all, despite members’ protests to the contrary, the Fed is itself a political institution. Not in the sense that it stacks the decks to help Democrats or Republicans: It doesn’t. But the Fed is interested in preserving its own legitimacy. It fiercely guards its independence, which has been under attack for the last few years, most visibly by the “Audit the Fed” movement. Despite the name, that is not about auditing the Fed, which is already thoroughly audited; rather, it is about making individual monetary policy decisions subject to congressional review.
If the Fed were to turn to unconventional measures in the months before an election, political furor would be likely.
Fed officials would face a very difficult decision: They could follow an expansionary monetary policy that would set the economy on a better course in the short run, but that could anger Congress, which could harm its effectiveness in the long run.
If economic circumstances are sufficiently dire — as they were when the economy cratered during election season eight years ago — that could tip the balance toward monetary stimulus.
But a more mundane slowdown — the kind where we spend a few months debating whether it’s a recession — is unlikely to elicit such a response.
Worse, market expectations of policy inaction can make the economy more vulnerable.
When investors are confident that the authorities will counter any recessionary forces, they don’t need to respond to every disappointment in the data. But when they expect inaction, even a minor slowdown might snowball into something bigger, raising the prospect of a rapid sell-off that might itself undermine confidence.
Even if the economy is doing well, there’s no guarantee that will persist: History teaches us that downturns are rarely expected. Even a healthy economy can suddenly slow if an earthquake in Japan disrupts global trade, strife in the Middle East causes oil prices to rise, or financial trouble in Europe becomes contagious. We rarely see where the next downturn is coming from.
Good economic management doesn’t focus on today’s success but rather on the possibility of tomorrow’s failures. By that metric, at least, we seem in danger of underperforming.
News: THE NEW YORK TIMES
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