What Fiscal Policy? The U.S. Doesn't Do It Any More

BlackRock CEO Larry Fink in New York on Nov. 12, 2013 Photograph by Peter Foley/Bloomberg

In an interview published in the Financial Times, BlackRock Chief Executive Larry Fink said he believes it’s time for the Federal Reserve to move on. From the interview:

“We have a central bank that has not admitted we have structural unemployment,” [Fink] said. “Factories that used to employ thousands now employ 200. For the US to grow above trend, it has to be about government policy not central bank policy.”

Rick Rieder, BlackRock’s co-head of Americas fixed income, said roughly the same thing when he came on Bloomberg Surveillance last week. He produced what BlackRock is calling the “Yellen Index,” a proprietary measure that examines employment and inflation indicators the Fed chair has said in the past are important to her, so as to predict what she might choose to do in the future. From Rieder on Surveillance:

I would say for the first time I think monetary policy has done what it’s going to do, I think a zero percent funds rate is not meaningful anymore in terms of transmission mechanism to the economy, I think fiscal policy for the first time, student loans, to housing, infrastructure discussion, I think you’re going to start to see some movement there for the first time in a while.

I wish I could share Fink and Rieder’s faith in fiscal policy. Or, better, their faith that fiscal policy is even a thing that happens. They are right, in the abstract, that monetary policy can do certain things, and that it’s up to governments to do other things through budgets and tax law. But in the U.S., since 2010, those things have not happened.

We don’t do fiscal policy anymore. We don’t actually pass laws designed to help or change anything about the country. We barely pass laws, once a year or so, in a wildly inefficient way, to just kind of barely keep things running.

Rieder mentioned infrastructure, and certainly there’s a long list of infrastructure projects that need funding. We’re about to pass a highway bill. It does nothing more than barely extend funding for existing projects until May 2015. It does this not by raising money from people who use highways, but through—depending on which version of the bill makes it to the president—a completely unrelated accounting stunt that allows companies to temporarily put less money into their pension plans, raising taxable income.

This is not fiscal policy. It’s drunken staggering, only marginally better than the drunken-prone yelling it replaced. I agree with Fink and Rieder that monetary policy has its limits. But we’re relying on it, still, because the Federal Reserve is the only institution in the District of Columbia that is capable of carrying out any policy at all.

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