Continuing the Stimulus Is Not Perfect, But Clear-Cut for Now

The big financial news this week was the decision by Ben Bernanke and the Federal Reserve to carry on with its current, or QE3 (Quantitative Easing #3), stimulus efforts.  That may not seem like such a large event, but with Bernanke saying two months before that he expected to reduce or even stop the ongoing monthly Fed purchases of $85 billion in United States Treasury bonds and mortgage-backed securities, both stock and precious metal markets treated it as a major pleasant surprise, and both jumped – the Dow Jones Industrial Average and Standard & Poor’s 500 index both reached record highs, and gold rose over $60.  Commercial interest rates, which had increased more than 1% since June, also dropped.  

Although the $85 billion amount may not last long, as the Fed will consider a reduction as soon as next month, the collective decision on the stimulus will be based at least in part on unemployment rates.  In June, Bernanke had said that if unemployment went below 7% QE3 would end, but he did not confirm that this week.  Instead, his messages were that “conditions in the job market today still are far from what all of us would like to see,” unemployment was “well above acceptable levels,” and that the Fed was “looking for overall improvement in the labor market.”   His organization also indicated that very low base interest rates would not increase until unemployment went below 6.5%, and maybe not even then. 

So what has happened in the year since QE3 started?  Much of it has been good.  Official unemployment dropped from 8.1% to 7.3%, and the AJSN, showing the number of jobs that could be quickly absorbed, fell from 22 million to just under 21 million.  Labor force participation, however, has decreased from 63.5% to 63.2%, its current level a 35-year low. 

During the past year, the stimulus has added about $1 trillion to the amount of money available.  The result of that, though, is not what many would expect.  Although its two most common measures, M1 (notes and coins in circulation, traveler’s checks and checking accounts) and M2 (all of M1, plus savings and personal money-market deposits) have indeed risen substantially, 9.1% and 6.8% respectively, inflation has not followed along.  The monthly rate has actually decreased, from a 1.7% annual basis in August 2012 to 1.5% last month, with the highest intervening figure 2.2%.  Meanwhile, the official annual economic growth estimate is now 2.0% to 2.3%, down three tenths of a percent from June’s prediction, and the Fed expects it, along with inflation, to be low for years.  The number of jobs created or saved by the current stimulus is unknown, but a USA Today editorial, which was actually against continuing QE3, credited that and the previous effort, over three years, with 6 million.  Income inequality has been reaching long-time records, with the share of national income from corporate profits reaching a 90-year high and the share of that going to workers at a 50-year low.  More and more money is pooling up in a shrinking number of places, and a spectacular story from this week claimed that the richest 400 Americans had more in net worth than the entire economy of Russia. 

So is the stimulus worthwhile?  It clearly injects a distortion, and, as the USA Today editorial pointed out, it makes bubbles more likely.  We don’t know what our largest companies would do if their cash reserves got well into the trillions, but we may find out it is nothing good.  However, QE3 is clearly healthy for the economy the way it is.  We are getting no help from Congress on such things as a public works program that could provide millions of jobs doing things ranging from highly beneficial to utterly necessary, or on reforming corporate taxation to reward companies hiring and retaining American workers.  Although the amount of press on the possibility that the jobs crisis is permanent has increased at least tenfold since Work’s New Age was released in 2011, no House or Senate bills, to my knowledge, have been introduced to mitigate it.  As long as unemployment-rate drops are offset by lower labor force participation, there is no sensible reason to think the economy is substantively improving, modest increases in housing prices notwithstanding.  Accordingly, the stimulus must continue.