With Fiscal Policy, Politics Trumps Economics

This week’s Courier Herald column:

In the past few weeks I’ve written a series of columns that have attempted to explain the current economic conditions, what the Federal Reserve is doing to combat inflation and the likely implications of their moves, and tried to break down the formal economic terms we hear and read in the daily news into plain English.  Today we’re going to extend that a bit into discussing economic policy outside the purview of the Fed. 

Fiscal policy represents the other government set of tools that are available rely on the elected branches of the government.  Congress and the President are in charge of the these and also bear responsibility for economic consequences.  In watching the questions from Senators on the Banking Committee Wednesday, it appears many of them don’t understand their role in shaping the economy, or – more likely – they wanted to use their soundbites to ensure that you don’t.

Fiscal policy is the money that is spent by the government and how it works its way into and through the economy.  This of course, also involves the taxes and fees the government levies, as this takes that same money out of the economy.  It involves the money that the government has to borrow when it spends more than it taxes, which gooses today’s economy at the expense of future economic activity.  And by extension, it also involves the regulatory framework of rules the government imposes that can either stimulate or curtail economic activity.

Note these areas are considerably more expansive, flexible, and can be extremely broad or narrowly focused.  In theory, fiscal policy can be tailored as sharp and precise tools to perform a surgical economic strike as opposed to the Federal Reserve’s extremely blunt and limited levers to pull.

Economists and our elected officials are in general agreement that the root of our country’s current economic challenges are rooted in supply problems, not a lack of demand.  Yet the Federal Reserve’s tool kit to curtail inflation can only attempt to bring demand down to match current supply constraints.

The elected officials, however, have almost unlimited options available to incentivize suppliers or to pause or eliminate regulatory burdens that add friction within the system.  The biggest problem here is that it’s easier to shift blame to the Federal Reserve than it is for an elected official to weigh in on trade-offs, many of which would require actions that would meet with disdain from their political bases.

While semiconductor chips have long been a supply chain nightmare for America’s manufacturers, the more pressing need to put a check on rising food and energy prices would be to find ways to increase a supply of both.  And yet, there’s one glaring “solution” to this problem that helps explain why politics often interferes with fiscal policy resulting in exactly the opposite outcomes.

A headline from Rollcall encapsulates the problem: “Biden scores points in Midwest with ethanol announcement”.  In April, the President decided to stretch our oil supply by increasing the amount of ethanol, made from corn, added to our gasoline.  It’s good politics for an administration that desperately needs additional support from rural areas.

It’s also horrible policy.  At a time when the world is about to enter a dramatic food shortage where many of the poorer countries will face conditions of famine, we’re going to shift some of our food growing capacity into energy use.

The reality is that there are no quick fixes, as food must be planted and harvested well in advance of being processed and hitting our store shelves.  Likewise, the supply of our own domestic oil production is a function of our lack of response to Saudi Arabia and Russia flooding the market to kill our domestic industry under President Trump, followed by President Biden’s numerous executive orders and Democratic Congressional Leaders’ attempts at every turn to deny capital investment to the industry under the guise of “ESG investing”.  It’s the mirror image of the demands for “cheap oil” that let us – quite temporarily – enjoy foreign powers try to bankrupt our domestic producers.

The best time to plant a tree is 20 years ago.  The next best time is today.  We need to have an honest and frank discussion about what our domestic energy, food, and manufacturing capabilities must be to ensure defense, economic, and climate security. 

Trade-offs are demanded.  Extremists on all sides would be unhappy with the result.  That’s usually what good policy demands.