By Avraham Shama
February 28, 2020 at 5:00 am ET
Under President Donald Trump, U.S. economic expansion has slowed, hurting consumers and businesses over the past two years. Yet Trump opened his State Of The Union address earlier this month taking credit for the economic performance of a growing economy, low inflation and low unemployment. But these achievements belong to another Republican — Federal Reserve Board Chairman Jerome Powell — whose monetary policy made such gains possible.
The coronavirus makes it imperative for the two men to work together to develop not only a U.S. response, but also a worldwide strategy to counter its effects on health and the economy. Powell and his team became the de facto economic policymakers over the past two years, while Trump abdicated his fiscal policy responsibilities. Should this continue, the
coronavirus would put his second term at a higher risk.
Take Powell’s accomplishments in the areas inflation, growth and employment. Since he was confirmed on Jan. 23, 2018, inflation has hovered around 2 percent and spurred growth through increasing consumer spending on real estate and many other goods and services. Such low inflation also propelled many Americans to move their low-yielding savings to the booming stock market and made them wealthy, which increased their optimism about the future as well as their demand for products and services.
Likewise, economic growth has been reasonable and the associated wage growth put consumers in a spending mood, which in turn grew the economy further. As a result, employment continued to go up, and unemployment down — from 4.1 percent when he was confirmed in 2018 to 3.6 percent in January 2020. As the president stated in the SOTU address, unemployment among minorities, and especially among young black adults, is the lowest it has ever been.
Since taking office, Powell and his team have been on the top of their game. Except for a notable misstep raising the funds rate in December 2018 then reversing course quickly when they realized it, they have maintained appropriately low Fed funds rate, which assured low inflation and brought about solid economic growth.
On the other hand, Trump and his economic team started, escalated and somewhat eased a still-ongoing trade war with China, which slowed U.S. economic growth. They have also re-wrote the NAFTA agreement with Mexico and Canada, and the TPP agreement with Pacific countries without much impact on the U.S. economy. Most famously, their Tax and Jobs Act of 2017 had produced modest and fleeting economic growth.
It is true that by tradition the president takes credit for all economic accomplishments under his watch. But not in this case. The president has relentlessly criticized the monetary policy of Powell, whom he had selected, and his board. He even called Powell his worst enemy and crazy.
The Fed achieved all of this growth, low inflation and a record high employment using only one set of economic policy tools available to them — the monetary policy tools, which affect the amount of money in the economy. The other set of tools — the more robust fiscal policy tools, which directly affect total demand for goods and services in the country — are directed by both the executive and legislative branches.
But steering the economy using only the rudder of monetary policy tools could be dangerous, ineffective and sink our economic boat. The Fed can lower the funds rate, hoping the resulting low interest rates would increase consumer and business demand, and thus increase growth. But there are no guarantees that such growth would materialize, because consumers and businesses may choose not to increase their spending and thus keep the economy sinking. The same logic goes for Quantitative Easing. Looking back, the U.S. was lucky that the Fed’s rate lowering did induce growth in the past two years.
Of course, the Fed could lower the discount rate to zero and below and somehow force growth. Such a drastic measure had been praised and desired by Trump in his Davos speech last month. However, negative rates may affect investment and economic decisions in ways that could produce economic decline rather than growth, when, for example, the uncertainty produced by negative rates reduces consumer and business demand.
The Fed is aware of the limits of its tool box and has been looking for additional ways to help navigate the economy under different conditions. For example, it has initiated Fed Listens — tours to different communities to identify ways for the Fed to realize its dual mandate of low inflation and unemployment. And it has floated the idea of capping yields on treasury securities to combat recessionary forces if they emerge.
Compared to the Fed’s monetary tools, the fiscal policy tools available to the executive and legislative branches are much more powerful and reliable in producing economic prosperity than the monetary tools.
Trump should concentrate on using the surefire methods of fiscal policy tools to win a second term. But he may be running out of time — the time needed to pass economic acts and to have them percolate in the economy to produce positive results well before the presidential election in November. Thanking Powell’s helping hands would be well-deserved.
Avraham Shama is the former dean of the College of Business at the University of Texas, The Pan-American. He is a professor emeritus at the Anderson School of Management at the University of New Mexico and his book about stagflation, “Marketing in a Slow-growth Economy,” was published by Praeger Publishing.
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