What needs to be done to fix the economy? Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, recently gave a partial answer in a recent speech on the current economic condition:
This has been a remarkable year. The great comedic writer P.G. Wodehouse pretty much summed it up when he wrote that “just when a (fellow) is feeling particularly braced with things in general … Fate sneaks up behind him with a bit of lead piping.”
[. . .]
I maintain that no matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it; or until you are reassured that the sinkhole of unfunded liabilities like Medicare and Social Security that Republican- and Democrat-led congresses and presidents alike have dug will be repaired so that our successor generations of Americans will prosper rather than drown in dark, deep waters of debt.
My colleague Sarah Bloom Raskin—one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English—recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away.
From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president—the makers of fiscal policy and regulation—roll up their sleeves and get on with the yucky task of cleaning out the clogged drain.