Today marks the beginning of the annual meeting of central bankers in Jackson Hole Wyoming. The central bankers of the world meet annually here to discuss their shared mission of ensuring that the world's financial markets continue to fuel economic growth around the world. Unfortunately, they are confronted with the same problem they have all faced since the great recession "ended", namely that they are seemingly incapable of achieving their missions. With persistently low inflation, low labor participation rates and slow economic growth from the entire first world, it is undeniable that the central banks of the world have failed to achieve their shared goal of persistent economic growth. Numerous newspapers around the world have taken the opportunity this meeting presents to opine on why this is and what should be done about it. Once article in particular struck me though; it's an opinion piece in the Wall Street Journal by a former member of the Federal Reserve board who has turned academic. Here's the Link . I encourage you to read the piece because I think it has some very prescient ideas about how the US Fed system needs to change.
What got a bee in my bonnet about the above linked article though was the repetition of the sentiment that academics and central bankers are confused as to why we have slow growth in the first world. Now, I've talked about this before Link , but the reason we have slow growth is anything but a mystery. We have strangled growth with high taxes, vast and expensive regulatory states, vast debts (both at a government level and at an individual level) and laws that encourage multinationals invest in the developing world while stymieing growth of small business back home. At this point, the continued complaint feels a lot like the famous Simpsons quote: "We've tried nothing and we're all out of ideas!" Link . The real problem here is that the Fed's mandate is to control unemployment and inflation by manipulating the federal funds rate and doing asset purchases and sales through the treasury. But, to solve the problem of persistently low growth, we need comprehensive regulatory reform to change the incentive structures that encourage businesses to move elsewhere and not reinvest their earnings at home. This means that the required reform literally is not within the Fed's powers. All the Fed can do is reactively adjust the interest rate and buy and sell assets, essentially manipulating the money supply, to try an get businesses to invest in labor and capital. There's nothing the Fed can do about the fact that international businesses are taking the cheap money, looking at the regulatory landscape, and are using that money to buy back their stocks, buy out competitors and move operations overseas to cheaper locales. The only way to fix this incentive problem is for the legislatures of the first world to undertake massive reform. Instead, what we have is infighting and regulatory sclerosis.
So where does that leave us? I predict that the results of the Jackson Hole meeting of central bankers will be a lot of hand wringing and a lot of doubling down on the same failed strategies. Until the governments of the world put on their big boy and girl pants and sit down and actually do some legislative reform, the first world is going to continue to follow in Japan's footsteps of ever increasing national debts and persistently slow or negative growth. So, to quote another internet meme, to the governments of the first world: "Your policies are bad and you should feel bad!" Link .
