Feb 1 2012

Ignoring Monetary Stimulus as Economic Policy

U.S. media offer austerity as nonsensical solution

Money/Photo: Flickr of 401(k) 2012

Money/Photo: Flickr of 401(k) 2012

With the United States now years into a crippling economic downturn, and Europe facing a looming economic crisis, media have been covering the economy more than any other issue. The two most recent annual reports on U.S. media coverage from the Pew Center for Excellence in Journalism (2009-10) conclude that “the No. 1 story of the year was the weakened state of the U.S. economy.”

Despite this enormous amount of coverage, corporate media present only a narrow range of possible policy prescriptions for the economic crisis. While reducing entitlement spending and otherwise cutting the deficit tend to worsen economic downturns, they have been the policy solutions the mainstream media has amplified the most (Extra!, 6/10). Meanwhile, policies that are traditionally more effective for recovery are either disparaged—the treatment given to fiscal stimulus—or, when it comes to monetary stimulus, largely ignored.

This dynamic prompted Ari Berman of the Nation (10/19/11) to ask about this “central paradox in American politics over the past two years”:

How, in the midst of a massive unemployment crisis—when it’s painfully obvious that not enough jobs are being created and the public overwhelmingly wants policymakers to focus on creating them—did the deficit emerge as the most pressing issue in the country? And why, when the global evidence clearly indicates that austerity measures will raise unemployment and hinder, not accelerate, growth, do advocates of austerity retain such distinction today?

The answer, Berman argued, is that the media narrative has been dominated by an “austerity class” made up of Washington pundits, politicians and think tanks with a shared interest in redirecting government finances to the corporate private sector. From the point of view of these advocates for the 1 Percent, the most effective way to revive the economy—restoring lost demand by increasing the supply of money and putting it in the hands of the poor and middle-class people most likely to spend it—is also the worst way. And so, in the corporate media discussion, monetary stimulus remains safely off the table.

In 2009, Barack Obama and a Democratic Congress passed a $787 billion fiscal stimulus program, attempting to revive the economy—which had lost trillions of dollars in the collapse of the housing bubble—by borrowing money to pay for tax cuts and deficit spending. While this stimulus did save and create jobs, it was by many accounts too small (Huffington Post, 3/11/09), and the economy continued to struggle with high unemployment. Soon the idea of more stimulus was portrayed as unthinkable nonsense in the media (Extra!, 9/09), and when Republicans made major gains in Congress in the 2010 elections, a second stimulus bill was deemed a political impossibility.

Meanwhile, the option of using monetary stimulus through the Federal Reserve was virtually ignored.

“There have been many articles that wrongly asserted that the Fed is out of bullets, that there is nothing more that it can do. This is not true,” economist Dean Baker, who monitors economic coverage through his Beat the Press blog, told Extra!.

It can target a long-term interest rate (e.g. set a 1.0 percent target on 5-year Treasury bonds) or it could target a higher rate of inflation—a policy advocated by [Ben] Bernanke for Japan before he was Fed chair. These policies have rarely been mentioned in news articles. They have repeatedly talked about the need to maintain the Fed’s credibility as an inflation fighter. Given the enormous costs that we are experiencing as a result of high unemployment, it’s not clear what sort of price tag we should put on this credibility.

There have been a few aggressive advocates for monetary stimulus—such as the implementation of another round of what’s called “quantitative easing.” Economist Adam Posen, writing in the New York Times (11/20/11) that central bankers ought to “stop dithering [and] do something,” suggested that central banks “should buy (or in the case of the Fed, resume buying) significant quantities of government securities to help push down long-term interest rates and encourage investment.” Such policies have also been advocated as potential alternatives to fiscal stimulus by Baker (Bloomberg News, 4/28/11), New York Times columnist Paul Krugman (11/7/10) and other economists.

But by and large the idea has been ignored, especially when compared to the media infatuation with economic “solutions” that are actually likely to devastate the economy, such as cutting government spending when unemployment is still at recession levels. Pew (7/19/11) found that when Congress was debating a deficit-reduction package last summer, coverage of the debt accounted for 31 percent of the news hole, whereas all other economic issues accounted for 4 percent of total coverage.

When the Federal Reserve recently chose not to aggressively intervene in the economy to help spur growth, the New York Times (12/13/11) reported that the decision was “widely anticipated,” a “yawner” and “dull, dull, dull.” The paper seemed perfectly willing to accept the Fed’s explanation that there is “evidence that the American economy was chugging back toward health.”

Describing the U.S. economy as “chugging back” is dubious; recent headlines about the decline in the unemployment number are, as the Financial Times (12/11/11) observed, likely the result of people quitting their job searches in frustration, and not a rise in jobs. “According to government statistics, if the same number of people were seeking work today as in 2007, the jobless rate would be 11 percent,” the paper’s Edward Luce reported.

The New York Times dismissal of stimulative measures from the Fed has been standard for the last two years. In 2010, the Times (8/28/10) reported that the Fed’s ability to take measures to boost growth was limited because the expansion of the debt has “ratcheted up fears that, one day, creditors like China and Japan might demand sharply higher interest rates to finance American spending.” As Baker observed (Beat the Press, 8/28/10), these “fears have no basis in reality,” because “if China and Japan ‘demand sharply higher interest rates,’ then it would mean that the dollar would fall sharply against their currencies.”

The same Times article also cited Germany’s supposed success during the recent economic downturn without fiscal stimulus, which Baker pointed out is “dishonest,” since the OECD reports that “government consumption expenditures increased more in Germany since the downturn than in the United States.”

The reason aggressive monetary action is so dismissed in the media has much to do with the access that bankers have to business reporters. The banks know that a modest (and healthy) dose of inflation, while making it easier for borrowers to pay off debts, would correspondingly cut into their profits (New America Foundation, 9/9/09). And so banking leaders, and disciples of their economic worldview, have used their frequent appearances in business journalism to push the narrative that anything that might cause inflation must be avoided at all costs (CEPR, 8/24/11).

A New York Times article from August (8/23/11), for instance, amplifies the hyperbolic anti-inflation argument that is so dominant in the mainstream media, and argues that “another reason Mr. Bernanke may be especially reluctant to signal commitment to further monetary stimulus is that inflation has picked up.” The article not only misled the public on the nature of U.S. inflation, which had actually been below the Fed’s target of 2 percent over the preceding 12 months (CEPR, 8/24/11), but relied only on sources who oppose monetary stimulus: The two economists quoted argued that announcing aggressive monetary policies would “smack of panic” and would amount to “pushing on a string.”

As in most articles about U.S. monetary policies, the Times piece also failed to mention that much of the power of monetary stimulus has been wasted by giving money to banks—who tend to hold onto it—as opposed to consumers, whose spending would boost aggregate demand.

Michael Corcoran (MichaelCorcoran.blogspot.com) is a freelance journalist based in Boston. He writes frequently for Extra!, as well as for such outlets as the Nation and Boston Globe.