The short Opinion piece in today’s US print edition of the Wall Stree Journal was very on point. In ‘Don’t Blame the Fed for Low Rates‘, Mr. William Poole writes that it is not the Fed that should be blamed for the persistently low interest rates we continue to enjoy – that are distorting many aspects of our economic life. The fact is that the Fed has to seek to meet its objectives in policy driven environment, set by the US government. Thus, says Mr. Poole, President Obama as the chief policy setter is the real reason the Fed has had to keep rates low. Specifically President Obama inherited economic problems and did little to resolve them, and in fact piled on the hurt.
The interesting part about the article is the question it leaves off the table: how can a monetary authority pull the right levers to achieve a goal of full employment, a specific inflation goal, or a target growth rate, when politicians (of both sides of the isle) control tax policy in all its colors. It seems that the US tax system is riddled with challenges that continue to distort behavior. Look at how firms continue to seek to pay less taxes through inversions. I think that behavior is logical and to be expected. But rather than add more and more rules on top of broken rules, why not dump the whole lot and come up with one simple rule? We could save ourslves a lot of money and time, and fire a lot of corporate tax lawyers to boot. Who would be unhappy at that – other than the lawyers?
Central banks have been independent of government agencies, mostly, for some years now. This was emphasized as a means to put a neutral authority in charge of monetary policy to help assuage the previous boom-bust cycle that we all experienced in the 1970s and early 1980s. Success with lower inflation rates and more steady GDP numbers seems to vindicate the change. However, the system overall has become more brittle and when it fails, that failure is now worse than the previous shorter-termed busts. So this is what we have right now. Perhaps we should remove central bank independence and let the politicians run amok – at least we know what to expect. Or perhaps we give central bank’s tax policy ownership too – and leave the politicians to just talk all day about other regulations (which they seem to love to do). Ether way, what we have is not working.