The Elephant in the Room and the Federal Reserve

            The Fed did the right thing on Wednesday afternoon when it decided not to raise interest rates.  In making decisions about interest rates, the Fed is supposed to be primarily concerned about 2 things: inflation and employment.  Generally, it’s supposed to raise interest rates when prices start to surge and lower them when unemployment gets too high.

            There isn’t any inflation to speak of, and in fact, Janet Yellen noted that world economic conditions, including a strengthened dollar and unusually low oil prices are holding inflation well below the Fed’s target rate. 

            And despite the fact that the economy is producing jobs at a brisk pace, there are still too many people who are either in part-time jobs but want full-time work or not participating in the work force because they’ve given up any hope of finding employment.  There also doesn’t seem to be the kind of demand for workers that would result in upward pressure on wages.

            Yet, all this attention on the Fed is diverting attention away from the elephant in the room.  That elephant is the GOP, which has been squashing all attempts to use fiscal policy to improve things for the middle class.

            Fiscal policy comes in two basic flavors.  First, Congress can use its spending power to pick up the slack in the economy when there isn’t enough demand encouraging business to produce more and hire more workers.  Second, it can cut taxes so that people will have more money to spend, thus, increasing demand and stimulating business.  Both types of policies normally result in higher deficits that must be financed by government borrowing.

            Republicans in Congress detest the first flavor and are loathe to spend any money on anything, except sometimes for the military.  They think most government spending is wasteful.  They’re fond of wringing their hands about federal solvency while ignoring the facts that (i) it would be smart to upgrade, repair or replace crumbling infrastructure now while interest rates are low; (ii) Congress can improve the country’s debt position by raising taxes when good times return; and (iii) the bond market isn't showing any concern about the ability of the government to handle debt because it's not demanding higher yields to compensate for additional risk.

            Republicans do sometimes like the second flavor of fiscal policy, but only when it’s in the form of cuts in the marginal rate.  They’ve allowed “holidays” on payroll taxes that mostly benefitted poor and middle income Americans to lapse while continuing to clamor for marginal rate cuts for businesses and the rich.

            The problem is that Republicans remain wedded to a discredited economic theory that burned brightly in the Reagan era.  It’s the “Field of Dreams” notion of supply side economics: if you make it easier or cheaper for entrepreneurs to build it, the customers will come.

            This is obviously an economic theory created in an ivory tower and advanced by people who have never run or managed a business like my wife and I do.

            We own a mom-and-pop outfit that sells corporate swag. We represent a large network of manufacturers who don’t have their own sales forces and will not sell to end-users.  We work with end-user companies that want to give  logo-marked stuff to their prospects, customers or employees.  Our customers choose the products they want to give out, and then we arrange for a manufacturer to make those products.  The manufacturer delivers the products to our customer and sends us a bill. We mark the bill up and send an invoice to our customer.

            Like almost all other small businesses, we do a lot of what it takes to keep the business running ourselves.  We sometimes do product research, billing and accounting and even packing and shipping after regular business hours or on weekends.

            We could hire other people to help us with these activities, but that would mean less profit for us.  Even if we hired another commission based salesperson, it would take over a year for the sales person to be billing enough to repay his or her associated overhead costs.

            There simply aren’t any tax breaks you can give us that would encourage us to expand the business or hire more people.  We’re only going to make commitments to people if we see more customers coming and our workload increases beyond the level where we can handle it ourselves.

            Since we deal mostly with the marketing and human resources departments of other businesses, we only get to do more deals when they are busy marketing or hiring.  Our clients only do more marketing when they think there is an opportunity to sell more to their customers.  And they only hire when their existing work forces can’t handle the additional work more potential sales could generate.

            Customers generally can’t spend what they don’t have.  They also don’t spend when they’re afraid of the future and want to deleverage or save.  Once people stop buying, the only way to protect the economy from tottering into recession is for some mammoth entity to provide the demand the economy needs to remain productive and efficient.  The only behemoth big enough to supply the needed demand is the government.  It can supply the demand by buying things needed for the general welfare such as roads, schools, bridges, computers, and scientific research.

            When ordinary people earn money, they spend it.  That encourages our clients to increase their marketing and hiring efforts.  If they buy more stuff from us, we can consider hiring more people to keep up with all those lovely new sales.

            This isn’t rocket science.  It’s just sensible business. Why the “party of business” doesn’t get it is a wonder.