Judd Gregg: Time for fiscal policy to drive growth

Judd Gregg, a former Republican senator from New Hampshire, served as chairman of the Senate Budget Committee from 2005 to 2007 and ranking member from 2007 to 2011. He recently wrote an op-ed featured in The Hill. It is reposted here.

We are in the midst of a slow and anemic economic recovery. Productivity, which drives any effective period of economic growth, has stagnated. 

There is genuine concern that things will not get much better over the horizon, and could in fact get worse.

There are many causes of this malaise; some explainable, some not.  

One of the core problems is that we have paid too much attention to monetary policy and not enough to fiscal policy.

The central banks have held center stage since the banking meltdown here, the sovereign debt crisis in Europe, and Japan’s economic stall.

During the period immediately following the financial crisis, the U.S. Federal Reserve actually performed well. The recession would have turned into a catastrophic event without the Fed’s aggressive intervention.   

But like the uncle who came to dinner and then just stayed around for the next meal, the Fed has remained at the center of the effort to rebalance and reinvigorate our economy for too long. 

This same case can be made in spades for the Bank of Japan and the European Central Bank.

The whole focus has been on the way these entities can manipulate interest rates and print money, supposedly paving the way for economic growth.  

Japan and Europe have gone so far in this effort that they now pay entities to borrow money, and print money to buy private debt.

This is not healthy.

In a trend that surprises no one, except perhaps the economists who market these approaches, the folks on Main Street in Europe and Japan have reacted by further curtailing their risk-taking and economic activity.   

When those responsible for the safety of the currency — the central banks — depart from all historic norms, it tends to really scare average folks.   

People realize something is very wrong. They withdraw from risk and conserve, in anticipation of the next shoe dropping. As a result, these aggressive actions by the central banks spark an undercurrent of fear that only exacerbates the contraction in their nation’s economies.

The Fed, fortunately, has resisted this excessive approach. But it has still played the “zero interest rate” card for too long in order to hype the economy, and especially the equity markets.   

While the effects of this have not been as extreme as those witnessed in Europe and Japan, the Fed’s actions have nonetheless created an atmosphere of concern that things are not normal. The result is a holding back of the economic risk-taking and new investment that are essential for growth.

The Fed seems to believe it must continue this abnormal policy of non-existent interest rates in order to keep the economy afloat.   

But the Fed is not the only game in town. Nor is monetary policy the only force the government wields to spur growth.  

Fiscal policy is where the action should be now.   

It is time for the Congress and President Obama to step up to their responsibilities in this arena.

The Fed has for too long given the president and Congress cover, allowing them to shirk their obligations to put in place fiscal policies that generate growth.  

Deficits are about to explode again and our debt-to-GDP ratio will soon be headed back to Greek heights — but the president and the Congress remain politically immune to this event because of the air cover the Fed has supplied them.

The American people see this, especially those who create the jobs by making investments and taking risk. They are standing down because they do not know where this all ends up.  

Congress, this president, and the one who succeeds him, need to take action — or at least propose actions — that will fix the fiscal policy in a way that encourages economic growth.

This is not rocket science. Two areas need to be addressed.  

One is to ensure that we have our long-term debt problem under control. The other is to enhance the fiscal policies that aid growth.   

The first requires a serious effort to reform our healthcare entitlements so they deliver affordable, quality care. The costs of healthcare, especially Medicare and Medicaid, are the single biggest threat to our future fiscal well-being.  

The second requires rewriting our tax laws to eliminate or reduce the vast number of deductions and exemptions. In turn, tax rates can be reduced so that investment flows not to tax avoidance but to real economic growth that creates jobs.

It is time to stop obsessing about whether the Fed raises rates by one quarter of one percent and start obsessing about fixing our long-term debt problems. 

That can be done by making America the best place in the world to invest, and by getting good, affordable healthcare.   

If it does these things, the government will at last have helped our people move along the path to prosperity.

"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.