Ironic, indeed, says Larry Kudlow today (http://www.realclearpolitics.com/articles/2007/10/anatomy_of_a_fabulous_fed_flip.html).
I’m just not sold that cutting the interest rate a couple weeks ago was the best thing. Do we really need more dollars in the system right now? Isn’t the dollar already weak enough (benefits to exports notwithstanding), and inflation a real enough threat? Most importantly, wouldn’t it be a good thing to steer Americans a little more away from charging on the credit card and more toward saving? For the record, I think the so-called trade deficit (since writing a paper on it in grad school, I refer to it as the ‘foreign direct investment surplus’) garners a much worse reputation than it deserves. It’s not nearly as much of a principled concern as the federal budget deficit, and national debt. It just seems a poor personality trait to me to charge something right now as opposed to saving for the purchase.
A step in this direction would have been supported by the Fed staying at 5.25%. I can only hope that this was a temporary, symbolic cut that allowed the markets to feel like the Fed was there at the ready, and that there will be no more cuts for a while. I actually wouldn’t lose any sleep if some inflation indicators perked up a little, compelling the Fed to pull rates back up. People have not incentive to stick some money in their savings accounts. We just do it because it’s a good idea to have some there. I’m sure we’re not the only ones who, at one point or another, had (much) more in credit card balances than in savings, or even assets such as automobiles.
For all the unwarranted worrying about the foreign direct investment surplus, it’d be hard not to see how the trade deficit wouldn’t come down if more domestic investment derived from Americans’ savings and investments, in something other than retirement accounts and homes. And really, how much of a negative effect would there be on the economy if Americans changed their habits in such a way? Even though some of the slowdown in consumer spending would be made up by the investment e made with their savings (via bank loans, stock investments, etc.), it could amount to just one quarter’s worth of GDP slowing. Once the adjustment is made, consumer spending could resume, but with real money instead of credit. Not only is that preferable financially, it would be good individually as people could teach themselves some discipline and patience. Plus, a new model of whatever they might want might be introduced, making the wait worth it.
On another note, do you really believe the recent jobs report would have been any, much different without the cut?? Please; I don’t think so. And while it might not have returned to its record heights of 14,000+, I bet the Dow Jones would have risen back up into the mid-to-upper 13,000s.
One last thing about the politics of all this. Speaking as a liberta
rian-conservative, while there is no part of me that believes Democrats espouse better ideas on economic and budget matters, Republicans deserve to be trailing Democrats in polling in all such matters (except taxes…huh?) . Almost 6 years of complete Republican control in D.C. and we get…a new farm bill, a tack on to Medicare, an expansion of the education department (doesn’t the Constitution prescribe that as a state matter in the 10th Amendment??), a 16,000-earmarked transportation bill, etc. etc. Is the budget deficit at a manageable level? Yes, but it could have been gone by now and paving the way for perhaps more tax cuts. Better yet, serious income tax reform. Who knows; we might have even had more success with Social Security reform.
Great; now I’m all depressed remembering what a lost opportunity Republicans had a few years ago.
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