David Malpass has an interesting article up on Forbes discussing the weakness in the global economy and how we might resolve some of the problems. He lists 5 different ideas that might help boost growth. Of those, two pertain to the USA and I think they’re somewhat off the mark. Here’s the commentary followed by my reasoning:(via Forbes):
“Let interest rates rise. The most important growth policy in 2014 would be for the Federal Reserve to lay the groundwork for raising interest rates, as it did for reducing bond purchases in 2013. It’s high time the Fed moved past zero rates—even a 0.5% interest rate would allow credit markets to work better.
New debt limit. Washington also needs to rewrite the debt limit so it restrains spending growth and puts a stop to the most ineffective spending. The current debt limit is a harmful masquerade—written by government for the purpose of expanding spending and debt. A starting point when debt exceeds the ceiling would be to prohibit new entitlements and limit the escalation of existing ones. Congress should reduce the future pay and health insurance subsidies of senior congressional and executive branch officials when debt goes over the limit.”
First, on interest rates – it makes no sense to raise interest rates in an environment where the economy is still weak and demand for credit is marginal at best. The problem in the USA over the last 5 years has not been dysfunctional credit markets. The problem has been a lack of demand for credit because consumers were swamped with debt and more focused on paying down debt rather than accumulating more of it. Lowering interest rates not only reduced the debt burden on creditors, but also helps increase demand for credit by making it less expensive to take on new loans. Increasing rates would have the exact opposite impact on consumers and businesses by making it more expensive to finance homes and business ventures. This remains an environment where low interest rates make perfect sense.
Second, the debt ceiling is a very poor tool for managing future spending because it is only breached AFTER spending has already been approved. I am all for efficient government spending and I think Malpass would agree that our government needs to be more cognizant of how it spends. However, it should not manage its spending by imposing self manufactured “crises” that threaten the creditworthiness of the US government. If the US Congress does not want the federal government to spend inefficiently then it should try considering this at the time they vote on the particular legislation that LATER causes us to hit the debt ceiling. The debt ceiling is an archaic constraint that almost no other government relies on . The USA shouldn’t either.
Basically, I disagree wholeheartedly with these two points. ZIRP (zero interest rate policy) is appropriate in this environment given the lack of demand for credit and the debt ceiling should just be done away with.