Does Quantitative Easing = A Vibrant Economy?

By Bob Gerecke

No.  As the chair of the Fed knows, fiscal stimulus is necessary along with the monetary
stimulus of quantitative easing: the aim must be to get money into the hands of
consumers.

Critics of Quantitative Easing (bond-buying by the Federal Reserve) overlook the fact
that the former Fed Chair was calling all along for fiscal stimulus by the
government.  He knew that monetary stimulus couldn't do the job alone, but
he didn't dare withdraw the monetary stimulus in the absence of adequate fiscal
stimulus.  I doubt that his expectations were unrealistic. On the
contrary, he knew that all he could do was prevent disaster.

It is unfortunate that the Fed lost its authorization to lend to non-financial
borrowers years ago. 
If it still had that authority, it could compensate
for the banks' reluctance to lend at such low rates to anyone other than those
who least need it.  If I were a banker, I would be reluctant also:
interest rates paid on bank deposits will rise and make low-rate loans losers.
If the Fed or another U.S. agency could fund or guarantee consumer and
business loans, not only mortgages, that would help, because banks' reluctance
to lend has been a problem as well as borrowers' reluctance to borrow.

Government lending to students has only boosted the incomes of colleges, and its loans to
small businesses haven't been enough.  Lending to the wider public is
needed. The government's tax benefits from a more robust economy will more than
compensate for any loan losses.  Credit unions and for-profit banks don't
have that benefit.
The sluggish response to monetary stimulus lends credence to the point of view
that trickle-up works better than trickle-down.  Average wages haven't kept
up with the cost of living: at least 90% of the gains in productivity have gone
into the pockets of employers.  Consumers have also been deleveraging by
paying off debt and spending less, thereby causing the velocity of money to
decrease.  Businesses have been reluctant to expand; that's a given if
they don't expect consumer spending to increase much.
 

The key ingredient in the economy is obviously consumer spending.  An
extension of unemployment benefits would help, both by enabling the unemployed
to spend and by reducing the insecurity of the employed so they will spend more
freely.

An increase in the minimum wage will also help, both because its recipients will
spend every penny of it and because it will push other low wages up somewhat
with the same effect.
We have reached a situation in which consumers, i.e., employees, are no longer
earning enough to keep the economy humming.  U.S. businesses have grown
their profits largely by cutting costs. That has run its course.
Now their top line (sales) must grow, too.  However, in the absence
of robust employee earning and spending, investors increasingly turn to
trading, and businesses turn to emerging country investing, in order to reap a
return.  These, too, rob the U.S. economy of stimulus.
 

Our economic future is bleak if we fail to increase the employees' share of
business income and the consumer spending which this will generate.