Outside editorial: You can't fault the Fed

Posted: Sunday, November 07, 2010

The following editorial first appeared in the Los Angeles Times:

The Federal Reserve announced that it will try again to spur the economy through a second round of "quantitative easing," which is Washington-speak for "conjuring money out of thin air." But the Fed's plan to purchase $600 billion worth of long-term Treasury bonds won't double the country's sluggish growth rate or slash unemployment. It's just a nudge to the economy, not a shove.

The problem for the Fed is that it is failing at one of its core missions - to keep unemployment low - and it's already tried all the monetary tools at its disposal. But it's hard to blame Federal Reserve Chairman Ben Bernanke, who's been a remarkably active leader of the central bank. The real fault lies with Congress, which hasn't been doing enough to stimulate the economy. That's the loudest message from Tuesday's election. Voters weren't mad at Democrats for trying to stimulate the economy; they were mad at them for not doing it effectively.

Although there's no simple and sure way for Congress to spark the economy, lawmakers have a variety of options. The threshold question is whether they're willing to borrow more heavily to finance new tax cuts or spending - for example, more federal aid for bridges, train lines and other infrastructure projects. They should be willing to do so in the short term in conjunction with adopting a credible plan to bring the deficit under control over the coming decade. But given the GOP's rhetoric during the campaign, it seems unlikely that Republicans would support even a temporary increase in the deficit for the sake of another stimulus package.

Here's another option: Rather than extending $700 billion in Bush-era tax cuts to individuals and partnerships with the highest incomes over the next 10 years, why not use some or all of that money to suspend payroll taxes for new hires for the next two years? That would be a growth-oriented tax cut. Or how about temporarily slashing taxes on foreign earnings that U.S.-based multinational companies bring into this country, then using the resulting spike in revenue to finance a payroll tax holiday or other stimulus effort?

Instead of exploring what they could be doing, lawmakers have spent recent months bickering over which of the Bush tax cuts to extend and whether to cancel the unspent portion of the Democrats' 2009 stimulus package. And now the incoming House GOP majority seems determined to launch Pyrrhic assaults on the health care reform and financial regulatory laws, despite certain vetoes by President Barack Obama. Economists are split on the merits of Bernanke's quantitative easing plan, which could weaken the dollar and promote inflation. But at least Bernanke is trying. If only he had more help.



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