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I’m hearing more chatter about additional quantitative easing (“QE”) lately.  Adam Posen of the Bank of England is suggesting that the BoE, Federal Reserve, and ECB all engage in more QE.

Posen:  Central Banks Need to Act

First off, it’s unlikely that additional QE will have any meaningful impact on the economy at this point.  We’re already at zero percent interest rates, and we’ve been there for awhile.  This is sort of similar to taking an antibiotic that becomes less effective with each round.  It’s unclear how another round of QE will do more than the last two rounds did (which is to say, not much).

By focusing on monetary policy, many are ignoring the real issues.  The US is actually in a recovery right now, at least on the housing front. It’s just that we’re having an extraordinarily weak recovery and the reason for that has nothing to do with tight monetary policy and everything to do with poor regulatory and fiscal policies.

Dodd-Frank has helped restrict lending and is driving smaller banks out of business.  This has compounded a lot of our problems in the financial sector.

Obamacare is actually a massive series of tax increases, some of which are “stealth taxes” in that they are collected by insurance companies, rather than the Federal government.  Due to its poor design, it will also likely increase healthcare costs and start eating up a larger chunk of American GDP than before; harming investment in other sectors of the economy.

Meanwhile, the current administration seems deadset on dramatically raising taxes in order to pay for its costly programs and the spiraling out of control costs in America’s entitlement programs.  Indeed, there are major parallels to the Hoover Administration here, as Hoover was the last President to increase taxes on such a grand scale during peace-time.

The problem with higher taxes is that they are essentially private sector austerity.  Every dollar taken away from the private sector, is a dollar taken away from investment and growth.

The debate in the US has shifted to nonsense.  We keep hearing about “tax cuts for the rich”, rather than how those tax cuts will create significant economic growth.  Indeed, every major American growth cycle of the 20th Century has its roots in tax cuts.

In the 1920’s, the Republicans dramatically lowered taxes after World War I, helped fuel the prosperity of the 20’s.  During the Great Depression, this policy was reversed, as Herbert Hoover dramatically increased taxes, thereby exacerbating the Depression.

In the 1950’s, the boom was preceded by more tax cuts.  In the 1960’s, Kennedy campaigned on tax cuts and implemented them once in office.  And in the early 80’s, we implemented a major tax reform under the Reagan Administration that helped set the stage for 1980’s growth and the 1990’s boom.

It’s not that “tax cuts” are a cure-all for every economic ill.  But it’s important to understand what’s happening with a tax cut.  When the government cuts taxes, it puts more money back into the private sector.  That allows the private sector to invest more.  This is why it’s not a stretch to suggest that the 1990’s boom couldn’t have happened without the 1980’s tax cuts and reforms; those cuts helped stimulate investment in the tech sector, which then helped create major economic growth later.

A tax increase does the opposite.  It takes money away from the private sector and expands the size of government.  Only problem is that public sector investment is inherently inefficient, particularly in large nations like the US.   This means that we are eliminating high-growth investment in the private sector and replacing it with low- or even negative growth investment in the public sector.

All these policies are coalescing to keep the US economy in stagnation, even though the markets are desperately pushing us towards recovery.  Let’s quit focusing on monetary policy and start focusing on pro-growth policies on the fiscal end of things.

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