Going Right In The Wrong Direction

13476_jebhensarlingorb Going Right In The Wrong Direction WORD ON THE STREET: We are clearly in the midst of the slowest and weakest recovery in the postwar era, notwithstanding what we have observed to be the largest fiscal and monetary stimulus in our nation's history. Although one quarter a trend does not make, having negative economic growth in the last quarter was not good news.

Otherwise, we appear to be mired in 1.5% to 2% economic growth when 3% is the norm and clearly 4% is the potential. This translates into millions of lost jobs and hundreds of billions of dollars of lost revenue to the Treasury.

But beyond the numbers, we have to look at the people. I look at my constituents, I listen to them. They are concerned about how they are going to fill up their pickup trucks? How are they going to afford groceries? Their health care premiums have gone up. They are insecure in their paychecks. They are not getting ahead.

Many wonder where do we find the road forward? After quadrupling its balance sheet and engaging in unprecedented mortgage-backed security asset purchases and creating an extended negative real interest rate environment, there is a growing consensus among economists that the Federal Reserve's road has led us to the monetary ‘Outer Limits.’ And if one remembers that classic science fiction television program, typically the episodes did not end well. They did not have happy endings, and I fear this may prove true for the current Federal Reserve policy.

For diminishing marginal benefits, the Federal Reserve's unconventional strategy creates considerable risks. If the balance sheet is not unwound at the right time and at the right pace, we could be looking at another deep recession, soaring inflation or skyrocketing interested rates – all of which could make us look longingly and nostalgically upon the Jimmy Carter era of stagflation.

All central bankers are familiar with Walter Bagehot's diction of the central bank's lender of last resort function: ‘Lend freely at a high rate on good collateral.’ But many of us believe the Fed has gone way beyond that. The extraordinary measures of 2008 appear to have become the ordinary measures of 2013.

Bagehot also said, ‘What impresses man is not the mind, but the result of the mind.’ And although the Federal Reserve contains many impressive minds and many impressive public servants, currently millions of unemployed and underemployed Americans are not impressed with the results. I believe that is because today the economic challenges of our nation are fiscal in nature, not monetary. They cannot be solved by the Fed.

The reasons the nation is mired in the slowest, weakest recovery in the postwar era are simple. Under this president, we have seen a 53% increase in job-harming federal red tape and regulations that tend to fall into two categories: those that create uncertainty and those that create certain harm.

Under this president, we have witnessed a spending spree, including the $1 trillion failed stimulus that has grown government from 20% of gross domestic product (GDP) to 24%. Under this president, a long-threatened $1.6 trillion tax increase has just been imposed upon small businesses and many working families. Under this president, more debt has been created in four years on a nominal basis than in our nation's first 200 – now weighing in at approximately $136,000 per household.

So let's examine a tale of two recoveries: The 1981-82 recession was deeper in terms of GDP contraction, and unemployment was higher and the recession was similar in its financial nature. And in this case, the economy faced a dramatic contractionary monetary policy that pushed interest rates over 20%.

Yet because President Reagan ushered in a pro-growth tax relief, established budget discipline, relieved much of the burden of foolish red tape, and promoted and celebrated free market capitalism, we witnessed one of the quickest and most powerful recoveries in the nation's history. President Obama and the U.S. Senate could certainly profit from this example.

Again, today our challenges are primarily fiscal in nature, not monetary.

I have no doubt that our president is quite capable of designing the meager budget savings represented in the sequester in such a way as to maximize pain to the American people. But as a matter of fact, even after the sequester, government outlays will be $15 billion more next year and 30% greater than the year President Obama was first elected. Meanwhile, the national debt clock to my right and to my left continues to spin out of control, threatening our national security, our economic recovery and our children's future. Â

Rep. Jeb Hensarling, R-Texas, is chairman of the House Financial Services Committee. This article is adapted and edited from remarks delivered during a committee hearing on Feb. 27. The original text is online.

(Photo courtesy M. Dellacorte)


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