We Need More Than the Fed to Save Us

Robert ReichYesterday, I responded to the Fed’s decision to tie interest rates to unemployment. Although I think this is good, it is the least they could do, and they are doing it much too late. My biggest problem was that the Fed’s new unemployment target is 6.5%, which is nowhere near full employment. I noted that they were continuing to do the heavy lifting of the rich. And note: high unemployment (and 6.5% unemployment is very high) is great for business owners because it gives them the pick of the best employees for the lowest prices.

Robert Reich responded to the policy change this morning, Why the Fed’s Jobs Program Will Fail. His analysis is different than mine. In fact, it is even more depressing. He says that this is good policy, and I agree for the most part: it is at least better policy. But the real problem is that the low interest loans will not be used in a productive way for our economy:

But the sad fact is near-zero interest rates won’t do much for jobs because banks aren’t allowing many people to take advantage of them. If you’ve tried lately to refinance your home or get a home equity loan you know what I mean.

Banks don’t need to lend to homeowners. They can get a higher return on the almost-free money they borrow from the Fed by betting on derivatives in the vast casino called the global capital market.

What he’s getting at here—although he doesn’t say it—is that the American economy is not capital constrained. The truth is that companies are sitting on huge sums of cash. If they want to invest in infrastructure, they can. But they don’t, because there isn’t a demand for their products. This is kind of a game of anti-chicken with the economy. Everyone is waiting until someone else starts to spend.

It is interesting to look back at how Milton Hershey dealt with the Depression. Instead of sitting on his huge piles of money, he assumed that the depression would eventually be over. So he invested in his infrastructure and when things got better, he was in a great position to capitalize on it. Of course, there were other reasons why he did so well. For one thing, it is a hell of a lot easier to get people to splurge on a nickle candy bar than on a thousand dollar Buick. But still, Hershey was farsighted in a way that most businessmen can’t even imagine.

Reich says, rightly, that what we really need is to invest in the middle class. But instead, we are tearing down the middle class. The Michigan right-to-work fiasco is a good example. But it is bigger than that. We have Republicans who think that if only the rich get richer, all will be fine. Well, let’s look at how that’s going:

Corporate Profits and Worker Wages

This graph illustrates what Ed was saying over at Gin and Tacos yesterday. Basically, we are told that prosperity is just around the corner. All we have to do is take another pay cut or another benefit cut, and then all will be well. But as you can see in the graphs above, this isn’t the case.

Of course, I tend to think that the issue isn’t particularly the Republicans. We know that they are out to get us. But so is much of the Democratic Party. President Obama seems eager to “reform” Medicare. He, like many Democrats, seems more interested in seeming reasonable than in doing what’s right. Unfortunately, the Democrats are all we’ve got. And to their credit, they are at least trying to make the economy better for all of us. (But better still for the rich!)

And now we are in a situation where we cannot depend upon the Fed to save us. Instead, we must depend upon the crazy and evil Republicans and the morally uncertain Democrats. Reich sums up:

The failure is in the rest of the government—at both the federal and state levels—still dominated by deficit hawks, supply-siders, and witting and unwitting lackeys of big corporations and the wealthy.

But there is good news. If the government doesn’t do anything really bad, the economy will eventually heal itself. And I feel very confident that the Democrats will not do that much harm. This is why they are infinitely superior to the Republicans. This is why I voted for Obama.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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