The Fed Cannot Produce Sustained Economic Growth and Should Stop Pretending It Can

Today’s NY Times carried a front-page story entitled, “The Fed’s Problem: An Economy That Won’t Boom.” The Fed can do many things, but making our economy boom is not one of them. Getting our economy to grow on a sustained basis requires massive investment, upgrading our infrastructure, redesigning our tax, healthcare, Social Security, and banking systems from the ground up, getting our fiscal house in order, implementing major educational reforms, developing close partnerships between companies and high schools (as they do in Switzerland and Germany), and tasking firms that replace their workers with smart machines to provide them alternative jobs — not simply toss them onto the street.

The Fed has no ability to do any of these critical things, each of which I detail in my platform at Yet somehow we think the Fed will save the day by making our incredibly low short-term interest rates a tad lower. The Germans have a good-sounding word for nonsense. It’s Quatsch.

Investment requires domestic saving as well as an investment-friendly tax system. But saving hasn’t been on our country’s agenda for years. As for our tax system, it’s the least investment-friendly of any developed country.  This is why so many U.S. and foreign companies are leaving our country.

Whoever thinks we can spend our way to prosperity should think again. The postwar growth miracles in Japan, China, Southeast Asia, and Western Europe as well as our own high-growth experience in the Fifties and Sixties were all driven by very high domestic saving rates. In the early 1950s, our country saved 16 percent of its national income. Today’s our net national saving rate is just 4 percent.  Our net domestic saving rate was also 16 percent then and is also just 4 percent today.

In suggesting that adjusting short-term interest rates by a trivially smaller quarter or even half of a percentage point will make a major difference to the economy, the Fed is continually diverting the country’s attention from taking the tough and sustained decisions needed to actually restart the economy. In short, the Fed is selling economic snake oil at a time that the economy is getting sicker and sicker for a clear reason — it needs open heart surgery.

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