John Cochrane writes in his excellent blog, The Grumpy Economist, Should the Fed Risk Inflation to Spur Growth, 8/22/12.


Tight monetary policy is not the source of our problems. Monetary policy is loose by any measure. Anti-growth policies are our problem. Our economy is being stifled by over-regulation, chaotic taxes and policy uncertainty. You make money now by lobbying regulators for special treatment, not by starting companies. We fix that with growth-oriented policies that remove the source of the problem.

Inflation remains a danger, but not so much because of what the Fed is doing. U.S. debt is skyrocketing, with no visible plan to pay it back. For the moment, foreigners are still buying prodigious amounts of that debt. But they are mostly buying out of fear that their governments are worse. They are short-term investors, waiting out the storm, not long-term investors confident that the US will pay back its debts. If their fear passes, or they decide some other haven is safer, watch out. The inflation some are hoping for will then come with a vengeance.


He hits two important points. First, it is legislation, regulations, mandates and other friction costs that are restraining this economy, not stringent monetary policy.  What good is an endless supply of money if taxes and regulation make it impossible to deploy it profitably?  The same is true of demand stimulation.  Investors and owners of small businesses are sitting on their cash- a capital strike- in spite of huge demand stimulation. Trillions of dollars are sitting in individual cash accounts earning pathetic rates rather than risk it by deploying it in highly taxed, risky businesses with poor liquidity.

Secondly, this economy is a culmination of years of the Fed bailing out the government from poor fiscal, growth restraining policies. With near zero interest rates there is nothing more the Fed can do to stimulate growth as long as the Government seems to be doing its best to accomplish the opposite.  The strength of the dollar may be temporary.  The Fed is confident that they can remove liquidity fast enough if inflation surges but the suddenness of such a change in demand for treasuries makes this difficult.  Our inflation rate may be at the mercy of short term foreign demand.

Stimulus spending almost by definition is temporary and few businesses will spend for long term growth oriented investments facing only a temporary spurt of demand.  Furthermore this stimulus has largely been wasted on expanding bureaucracies, paying people not to work, and other non productive expenditures.  Calling these expenses ‘investments’ does not make them so.  Compare this to the stimulus of FDR which spent on TVA, dams and roads; investments which deliver value 70 years later.

Instead of working to create jobs with meaningful work, this administration has just “created” income for the non productive.  There is a huge difference.  The stimulus of FDR has value a century later.  Supplying income to the non productive destroys a work ethic and thus will continue to be a drag on this economy for years to come