photo: Marc Nozell
Stabilizing the national economy is one of the federal government’s key responsibilities. Is that too much to ask? OK, then, can we at least ask that the government not make things worse when instability strikes?
Not if you’re Marco Rubio. Sooner or later an oil price meltdown, a banking crisis, or a Chinese hard landing is going to threaten our economy with a new recession. If a President Rubio were to have his way, the federal government would be legally bound to allow the economy to drift rudderless onto the rocks.
I’m not making this up. I’m just going by Rubio’s own words. (And, yes, his views are widely shared within the Republican Party. I’m singling him out mainly because he expresses them so clearly.)
Let me explain the Rubio/GOP view of economic stabilization. If you remember your basic college econ course, you’ll know that the first line of defense against a recession is fiscal policy. When the economy goes into a slump, spending rises on unemployment compensation, food stamps, and other benefits. At the same time, tax receipts, which are linked to income, decrease. Because the spending increase plus the tax decrease automatically cushion the slump, economists call them automatic stabilizers.
If you’re a true Keynesian, automatic stabilizers aren’t enough. You add some discretionary fiscal stimulus in the form of road projects and maybe a temporary tax rebate. If the timing is right, that softens the recession even more and speeds the recovery.
The GOP has never been enthusiastic about Keynesian stimulus, but at least, in the past, Republican presidents and lawmakers had enough sense to allow automatic stabilizers to operate. Not Marco Rubio. He is an enthusiastic backer of a balanced budget amendment. Several forms of such an amendment are floating around, all of which call for federal spending and taxes to be in balance, not just on average, but every single year.
It sounds like a sensible idea, until you think about it. But then, you see that the idea of balancing the federal budget every year is nuts. It would mean that when the economy went into a slump, pulling tax revenues down, Congress would have to enact across the board emergency spending cuts to keep a deficit from emerging. The cuts would quickly hit jobs and household budgets. Consumer spending would fall, firms would cut output to fight ballooning inventories. Without the automatic stabilizers, a mild recession would turn into a tailspin.
As if cutting spending during a recession weren’t nutty enough, think what a balanced budget amendment would do during a boom. When the economy expands, tax revenue rises and those automatic stabilizers push the budget into surplus. With the balanced budget constraint temporarily off their backs , Congress would have a field day. Every lobbyist in town would get a grab bag of goodies—government contracts, subsidies, new tax loopholes or whatever—that would eat up the surplus before it formed. When the next recession came along, the government would have to slam on the brakes even harder to keep within the confines of the balanced budget law. (For a more detailed critique of balanced budget amendments, see this earlier post.)
A balanced budget amendment would make the conduct of economic policy far more difficult, but things wouldn’t quite be hopeless if we could count on the Fed to come to the rescue. Under current law, the Fed has two obligations: To prevent inflation and to maintain full employment. Economists call this the Fed’s dual mandate. During a boom, it means the Fed raises interest rates to cool inflation. In a slump, it cuts rates to stimulate employment. If rates go all the way to zero, the Fed can use extraordinary measures like “quantitative easing” to provide even more stimulus.
The Fed alone can’t fully stabilize the economy. Countercyclical monetary policy just isn’t powerful enough. But it helps. Economists are widely agreed that if the Fed had sat on its hands, the Great Recession would have would have become Great Depression II.
But candidate Rubio wants no part of monetary activism. Here is what he said about the Fed in this week’s South Carolina town hall:
That’s not the Fed’s job to stimulate the economy. The Fed is a central bank, it is not some sort of overlord of the economy. They’re not some sort of special Jedi Counsel that can decide the best things for us.
The Fed is a central bank. Their job is provide stable currency and I believe they should operate on a rules based system. They would have a very simple rule that determines when interest rates go up and when interests rates go down.
So just what is this “simple rule” Rubio is talking about? He provides the details elsewhere. His rule would replace the Fed’s dual mandate with a single mandate to prevent inflation. The Fed would be required to raise rates to stop inflation during a boom, but it would be barred from doing anything when unemployment soars during a recession.
Put the balanced budget for fiscal policy together with an anti-inflation single mandate for the Fed, and you get a national economic policy that is truly perverse. Remember that old war-on-drugs ad that pictures a farm-fresh egg (“This is your brain”) and a fried egg (“This is your brain on drugs”)? Here is my version—our next recession, and our next recession under the GOP: