Declaring the the global economy is “highly vulnerable” to adverse shocks, the International Monetary Fund is urging the United States and other major governments to prepare contingency plans that could be rolled out quickly to boost growth.
What options does the U.S. have? Traditionally, the federal government has two main policy levers: monetary and fiscal policy. If the U.S. had to act in order to counter a global economic slowdown, how are those levers looking at the moment?
Could we lower interest rates? Let’s see. Currently, one-month treasury bills yield 0.19% per year, or close to zero. Thirty-year bonds yield 2.88%. Yes, it’s possible to go lower, but not much lower unless we want to experiment with negative interest rates, which would wreak havoc with the banking and financial sectors with all manner of unpredictable consequences.
A more stimulative fiscal policy, then? According to the latest Congressional Budget Office projections, the U.S. is expected to run a $544 billion budget deficit in FY 2016, and the deficit (under current laws) will continue growing to nearly $1.4 billion a year by 2026 even in the absence of a recession as Baby Boomers retire and start drawing on Medicare and Social Security. Throw in a good recession, and you can add $500 billion or more to the annual deficit.
Fiscal and monetary policy can’t substitute for fixing flawed institutions. Three major sets of institutions — health care, education and transportation/land use — are highly dysfunctional and represent a tremendous drag on the economy. Between them, the three sectors probably account for a third of all economic activity. All are dogged by low productivity, poor quality and/or wasteful spending — and, of course, intensive government/political involvement at all levels.
With Washington in gridlock, it’s hard to imagine any positive change coming out of the nation’s capital. (Actually, it would be hard to imagine positive change even if Washington weren’t gridlocked.) The only saving grace is that each of these dysfunctional institutions are significantly impacted by state and local policy, which gives states the opportunity to enact at least partial fixes. Unfortunately, there is no will in Virginia to do anything more than tinker on the margins. I see little sense of urgency, much less a consensus on how to reform health care, education and transportation/land use. Given the power of institutional interests to thwart change — witness the power of the educational interests this year to block legislation to allow more charter schools and the uncertain fate of Certificate of Public Need reform — Virginia is mired in the dysfunctional status quo just like the rest of the country.
Time to buy that cabin in the woods. Meanwhile, keep reading Bacon’s Rebellion, the only blog that consistently writes about these under-performing institutions.
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