The president understands monetary policy has done more for the markets than Main Street
Rana Foroohar
It is amazing how adept Donald Trump is at identifying something important in the felt experience of the American public and then exploiting it for his own gain. So it has been with his suggestion that businessman and former presidential aspirant Herman Cain should be on the board of the US Federal Reserve. Just when we thought it couldn’t get any worse than pundit Stephen Moore, Mr Trump presents the Pizza King.
It is easy to dismiss the suggestion as the latest example of the president’s economic cluelessness — as four Republican senators have done this week, making it unlikely that Mr Cain will secure a seat on the Fed board.
But we shouldn’t be dismissive. It is true that Mr Cain has no idea how financial markets work. This is a man who, along with Trump nominee Mr Moore, wanted interest rates to rise right after the 2008 crisis. But the president’s defence of Mr Cain is that he is not a policy wonk, but rather a job creator who understands Main Street. Mr Trump cares only about packing the Fed with political lackeys. However, he has nevertheless hit on an important truth — that monetary policy over the past decade has done much more for the markets than the real economy.
Consider that since the beginning of 2010, real hourly wages in the US have grown by only 6 per cent, while real housing prices have grown by over 20 per cent and inflation-adjusted stock market valuations have doubled. Household incomes have grown quicker than wages, thanks to employment growth. They are up 10 per cent from 2010 to 2017, though they still lag behind asset price growth. Meanwhile, the period 2007 to 2016 saw the largest increase in wealth inequality in the US on record.
This, along with record levels of corporate indebtedness relative to gross domestic product, were unintended consequences of the Fed’s efforts. The central bank could bolster asset prices, but couldn’t remove the principal drags on the economy. These do not stem from a lack of money, but from deeper challenges that monetary policy can’t solve — from a skills and jobs mismatch, through an ageing workforce, declining geographic mobility and greater corporate concentration, to technology-driven labour market disruptions.
You can’t fix those things with low interest rates and quantitative easing alone. You need fiscal policy decided on by elected officials, not technocrats. But polarised governments cannot deliver it. This is a conundrum not only for the US, but also in Europe, where arguments rage about the effectiveness of the European Central Bank’s monetary firepower and the merits of a co-ordinated programme of fiscal easing across the eurozone.
I worry a lot about this overdependence on central bankers. It amazes me that many of the same people who worried about too much easy money causing hyperinflation after the crisis (Messrs Moore and Cain among them) now argue for lower rates — not because they care about ordinary people particularly, but because it suits their political aims. We should call this exactly what it is: buck-passing — the kind that has happened many times before when presidents have wanted to paper over their problems with cheap debt.
It is not only Republicans who want to have it both ways, either. The current popularity on the left of “modern monetary theory,” or MMT, is driven by the idea that it holds out the prospect of a “people’s QE” of the sort proposed in 2015 by Jeremy Corbyn, the leader of Britain’s Labour party. The belief among some Democrats in the US is that they could circumvent contentious political debates over tax and spending by empowering the Fed to use its balance sheet to fund not financial asset inflation but real growth-creating investments in education and infrastructure.
The success of such a scheme would depend on low interest rates, low inflation and relatively sanguine credit markets. Whether or not you believe those conditions will remain, MMT would also politicise the Fed by making it appear that the central bank was being used to accomplish specific policy goals outside the democratic process. This, of course, is exactly what Mr Trump is doing, albeit to very different ends, right now.
The bottom line is that we are exactly where we were in 2008 — with politicians looking to central bankers to do what they can’t. But why would we ever believe that the Fed (or the ECB) could somehow magically change the fact that we have a bifurcated economy and a looming skills gap? Central banks can’t create growth by themselves. They can only funnel money around.
Mr Trump wants to disrupt the Fed for his own gain. But the Fed is already disrupting itself. The US central bank has recently embarked on a major review of its monetary policy framework, including a listening tour in which regional governors will be talking to people outside their ivory tower — business leaders, mortgage borrowers, pensioners, millennials, labourers and entrepreneurs. The idea is to consider the ways in which the real economy has changed over the past several decades, and think about whether monetary policy should evolve too. Perhaps by the time they finish, we’ll also have an administration and a Congress ready and able to play their part.
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