Government Isn’t Here to Help

08/09/2011 10:11 am EST

Focus: MARKETS

Igor Greenwald

Chief Investment Strategist, MLP Profits

Washington is addressing the wrong problem, leaving the Fed to prop up the economy as best it can, writes MoneyShow.com senior editor Igor Greenwald.

Americans’ faith in government is at a longtime low, and little wonder.

After the debt-ceiling crackup and a humiliating credit downgrade—justified by the evident political dysfunction—and after a decade of ineffectual economic policymaking that’s left the country on the verge of a third recession in that span, it’s tempting to return the political establishment’s contempt and the federal bureaucracy’s apathy measure for measure.

Tens of millions do, fueling the Tea Party’s electoral successes. Rugged individualism, not to say Social Darwinism, is ascendant. The comment sections on 10,000 Web sites recite Ronald Reagan’s knee-slapper about the most dangerous words in the English language being “I’m from the government and I’m here to help.”

Uncle Sam’s had a bad decade, to be sure. It owns 9/11, Homeland Security, and Katrina, wars in Afghanistan and Iraq with the usual wartime outrages, snafus, and miscalculations, as well as Enron, Worldcom, Fannie, Freddie, AIG, and Bernie Madoff, all passing SEC inspections with aplomb.

But every long-standing institution has a bad decade now and then. And from a longer-term perspective, the US government has been one of the most successful institutions known to man.

I’m not going to cite demonstrations of technological and military might provided by the Manhattan Project, human spaceflight, or the government computer network that ultimately grew into the Internet.

I’m not going to fall back on the successful prosecution of two world wars, or the rebuilding of a democratic Germany and Japan, or the defense of South Korea.

I’m not even going to rely on the development of the social safety net that so hampers us today, but which every advanced and emerging economy has copied. Or the successful War on Poverty. Or the government’s crucial role in the campaign to secure civil rights, which also became a model the world over.

I would, however, point out that the polio vaccine was developed on a government grant.

More generally, the US government has fostered an economy that provides many citizens with an enviable standard of living. And it’s done so by encouraging private enterprise…yet often interfering heavily in pursuit of political objectives.

Many of those policies were successful, from settlement incentives that secured the continent, to the adoption of child labor and antitrust laws, to the wartime spending spree that ended the Great Depression.

I bring this up because we’re about to have (another) debate on what, if anything, the government should do about the nastiest economic downturn in 75 years.

This debate will not be taking place in Congress, which snuck out of town to national ridicule in order to raise what money it can against next year’s barrage of attack ads. And probably not in the White House, judging by President Obama’s unconvincing remarks following the credit downgrade by Standard & Poor’s.

NEXT: Why the Fed Will Act

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Given yet another opportunity to lay out his plan for boosting the economy, the President sleepwalked through a flat pep talk and earnest discussion of looming budget cuts before dusting off the old chestnuts about extending the current payroll tax cut and unemployment benefits.

As former Bush speechwriter David Frum tweeted, “Markets are saying: We fear recession and deflation. Washington consensus: now is the time to fight debt and inflation.”

If it were only the odd Republican apostate like Frum or liberal Nobel Prize-winning economists like Paul Krugman and Joseph Stiglitz pounding the table, and if their warnings from a year ago weren’t proving so prescient, we could discount their calls for Washington to act.

But now even “realists,” like Harvard’s Kenneth Rogoff and American Enterprise Institute’s Vincent Reinhart, expect the Federal Reserve to swing back into action soon, presumably with further asset purchases. These are insiders with an excellent grasp of the Fed’s thinking.

Rogoff, an author of a landmark treatise on debt crises, is often cited in support of the notion that the government can’t do much about a “balance sheet recession.” Yet he’s now worried enough to argue that "out-of-the-box policies are called for, especially much more aggressive monetary policy, however unpopular that may be.”

It will be extremely unpopular, of course, and greeted with howls by those who believe the first two asset purchase plans have failed. But they’re succeeding in pursuit of their limited aims, just like the 2009 stimulus did, by preventing things from getting that much worse.

The GDP revisions unveiled by the Commerce Department two weeks ago showed the last recession to have been much deeper than previously assumed, and the recovery since that much more modest. Meanwhile, the commodity price spiral has been broken and the deflationary forces of high unemployment and falling asset prices are reasserting themselves.

So the Fed should and probably will, act. It is the only part of government that can before next year’s election, which could well perpetuate the current gridlock with some new faces.

Fiscal conservatives worried about the mounting US debt had better hope someone in Washington does something to heal the economy. Because recessions are the real drivers of big deficits, present and future.

Today’s yawning gulf between federal government’s receipts and outlays is largely a byproduct of the economic decline since 2008. The surest way to negate whatever savings the special congressional committee comes up with is for the government to subject the already shaky economy to the shock treatment of an austerity regime.

Which is precisely what this government and Congress seem determined to do, causing much swearing before the next round of swearing-in.

But at least the Fed will be on the case. They’re not as smart as Robert Oppenheimer or as brave as John Glenn. But in the current mess, they’re all we’ve got.

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