It is refreshing to see someone of the Martin Feldstein
caliber recognize that there is a limit as to how good a good thing can be. On
May 10, 2013, professor Feldstein published an article in the Wall Street Journal
under the title: “The Federal Reserve's Policy Dead End” and the subtitle:
“Quantitative easing hasn't led to faster growth. A better recovery depends on
the White House and Congress.” The remarkable development here is that the
article ends like this: “The time has come … to recognize … that a stronger
recovery must depend on fiscal actions … by the White House and Congress.”
What is stunning about this view is that Mr. Feldstein has
put on one side of the scale of comparison the principle of “quantitative
easing” and put on the other side the principle of “fiscal actions.” He weighs
the two sides intelligently, and comes to the conclusion that the scale is no
longer balancing, a situation that needs to be rectified by calling on the
White House and the Congress to add weight to the fiscal side of the equation.
What this does is weaken the dogmatic argument to the effect
that the principle of “trickle down economics” is so absolute in its goodness,
the more it is pushed to the extreme, the more effective it becomes. Thus, the
more money you place in the hands of those who have it, and the less you take
from them in taxes, the more the economy will tend to grow. The result will be
that goodness will multiply and will trickle down to those who have little of
it to begin with.
Professor Feldstein was never that extreme in his views but
he often argued in favor of the production side of the economy being robust
without making enough reference to the fact that the consumption side must also
be robust to absorb what is being produced. This left the impression that he
meant to say consumption must wait for production to trickle some of its
goodness down to it thus give it enough purchasing power to consume what is
produced. It may not be one hundred percent trickle down but it sounds very
much like it.
Because in a modern industrial economy things are done or
left undone by the way that you print and distribute money, the central bank –
known in America as the Fed – becomes the ultimate decider as to how much the
production side of the economy is itself supplied with money. As to the
consumption side, some of that money trickles down to it in the form of wages
and salaries – but money can also come to it from the government which, in
America, is referred to as the White House and the Congress.
And this is the point where the debate between the
supply-siders and the consumption-siders began to heat up. The point that the
supply-siders kept repeating and still do, is that the money spent by
government is money that comes to it in the form of taxes raised on the
businesses that create jobs. And this, they say, contributes to the slowing
down of the economy.
It was difficult to argue against that point till something
big happened; the economy of America almost collapsed in 2008 and was followed
by Europe. To rescue the world from a depression, the “Western” central bankers
discovered a trick that the Japanese had made use of before them. It was for
the central bank to pump money into the economy in an operation they called
“quantitative easing.” That is, they said: Never mind why the money is printed,
just print more of it and give to the supply-siders so that they may trickle
some of it down to the consumption-siders and keep the economy going.
The approach worked for a while but then the economy not
only came to a halt but could not even remain afloat. The Japanese created the
metaphor of someone pushing on a string to describe the reality that the
supply-siders had hit a saturation point beyond which they could not absorb
more money. Without this mechanism, money could not reach the consumption side,
a development that prompted the American Fed to come up with another idea. It
called it “portfolio-balance,” described by Feldstein this way: “When the Fed
buys long-term … securities, private investors can no longer buy them therefore
buy equities. That drives up the price of equities, leading to more consumer
spending.”
And when this did not work as well as expected, Feldstein
has finally hinted – using different words – that if the Fed can print all it
wants to supply the supply-siders with money, it can also print all it wants
and supply it to the government which – by fiscal actions – will place it in
the hands of the consumers. Again, using different words, he seems to argue
that this will pull on the string that the Fed is no longer able to push
effectively against.
And Feldstein will forever come to be known as the plumber
who fixed the hole in the trickle-down dogma of economics.