HICKS: Short-term fixes unlikely to ease downturn

To close watchers of the U.S. economy, the data yields a daily torrent of bad news. I could consume the entirety of this space recounting it, but instead will provide two key indicators. First, almost all the economic forecasts that appear monthly or quarterly have been revised downward, some for the third time. Second, the smallest tidbit of good news dominates the news cycles without moving financial markets.

Together, I take this as evidence that an increasing share of forecasters now join me in predicting a recession later this year or early in the next. So in this column I will discuss the policies we may see in response.

I think it unlikely that governments in the United States or Europe will act to spend more or tax less. Structural and cyclical deficits, partially as a result from stimulus programs, make this infeasible. Some action on the December sequestration (tax increases and spending cuts) would seem prudent, but in this politically animated environment, action appears unlikely until after the election. Voters need to step in, and they are not scheduled to speak forcefully on the matter until November.

Perhaps governments will consider a period of countercyclical regulatory policy. This sort of step might ease environmental, workplace and reporting requirements to spur more job growth, but I am dubious about this approach for two reasons. I question the impact of short-term regulatory easing (businesses thirst for certainty) and I wonder if it would be worth the cost.

We have regulations for some purpose (often bad purposes, to be sure), but I doubt the competency of a government that created these regulations to pick and choose the good from the bad in the next few weeks. No, governments will have little short-term effect on the coming recession, though I’m sure we’ll see some sham fixes.

Perhaps the only policies that are likely to work in this recession—and I give them scant chance—are those involving central banks. There are few limits to policies from the Federal Reserve or the European Central Bank to increase the supply of money and reduce interest rates.

The most talked about is another round of quantitative easing, or QE3. The most innovative is something I’ve heard called “Ben’s Fire Sale” that involves the Ben Bernanke-led Fed’s purchasing huge quantities of mortgage-backed securities for a fixed period, say one year. That would drive mortgage interest rates even lower, perhaps nearly to zero when adjusted for inflation.

The fixed term signals to consumers that, if they’d ever like to buy a house, they’d better do so now. While this might boost home sales, it necessarily creates another problem with bank solvency once inflation commences. Remember the S&L crisis?

So in the end, we are left with no good choices, and the best may well be to do nothing in the short run, focusing on the long run instead.•

__________

Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.