At the top of chapter 1 of The Age of Reagan: The Fall of the Old Liberal Order, Steve Hayward observes: “The year 1964 was the Year of Lyndon.” In one of his great philosophical statements of 1964, LBJ gave us the liberal credo: “And I just want to tell you this: we’re in favor of a lot of things and we’re against mighty few.”
It’s the liberal counterpart to my conservative worry list. There are a lot of things I worry about and mighty few I don’t (“global warming” would probably lead my short list of non-worries). Coming to the rescue of folks like me is economist Irwin Stelzer, who offers a worrier’s guide to “Selective worrying.” One problem: Stelzer legitimates some serious worries of mine:
Ben Bernanke’s Fed is printing money at an unprecedented rate in order to keep interest rates low. And plans to keep doing so until the unemployment rate drops to at least 6.5 percent. It is an enabler: The government is borrowing $40 for every $100 it spends (don’t try that in your house or business), and the Fed is printing money with which to purchase the IOUs the government is issuing, and then more so it can send interest payments to the treasury. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, fears that the Fed has gone too far and for no purpose, “that just throwing money at the economy is unlikely to solve the problems that are keeping a … worker from finding a good competitive job.” Richard Fisher of the Dallas Fed and Esther George of Kansas City also worry about Bernanke’s no holds barred use of the printing press. Among other things, zero interest rates are causing asset inflation—and shares, land, and house prices that are driven artificially skyward often come down with an unpleasant thud.
Enter the bond vigilantes. At some point investors will decide, as they did in the case of Greece and similarly situated eurozone countries, that the only way the U.S. government can pay its debt is by printing still more money, debasing the currency, and repaying its creditors with dollars worth far less than those it borrowed. At that point the interest rates they demand will shoot up, raising the government’s borrowing costs, driving down the value of the Fed’s portfolio of $2.6 trillion in bonds, driving up mortgage rates, aborting the housing recovery, making it costly for consumers to swipe their credit cards and throwing the economy into recession, or worse. This is a legitimate worry, one that makes the rulers of our biggest creditor, China, more than a little nervous.
Stelzer counts that as one worry, but I think he’s counting conservatively. Here are worries two and three:
A second worry with a realistic basis is that what has come to be called “the new normal” for the American economy includes an irreducible unemployment rate of 7.5 percent. Even if the lower Fed target of 6.5 percent is attainable, some economists reckon that at the current rate of job growth and labor force participation, we won’t get to that target until 2020. Others guess that even if the economy grows at annual rate of 2.25 percent—it is now growing at less than 2 percent, and that was before the recent increase in payroll and other taxes—it will take 5.4 years to get the unemployment rate down to 6.5 percent. The importance of removing impediments to economic growth is demonstrated by a second computation: If the economy would only grow at a rate one percentage point higher—3.25 percent—unemployment would drop to the Fed’s target in 1.8 years.
A final and wholly realistic brick in the wall of worry relates to the policies of the Obama administration. Its regulatory agencies have now filed their agendas for 2013: Proposed new regulations total tens of thousands of pages, with more to come as regulations implementing Obamacare and the Dodd-Frank financial reform law are written. These are not likely to stimulate growth or create jobs for other than bureaucrats.
That’s the bad news. Stelzer also purports to bring the good news taking certain worries off our list. Among Stelzer’s companion list of non-worries is the fear that we’re heading into a recession. But isn’t our slow-as- molasses economic growth something to worry about? That one is staying on my list.