You’re driving the center lane of a three lane highway on a rainy night. To the left are multiple speeding trucks. There’s a truck to your right and a truck behind. You hear the blast of an air horn and realize the right lane is ending. If you and the truck on the right both hit the brakes, you’ll remain abreast, and the truck will be forced to crush your vehicle against the speeding trucks to the left, or careen off the road. Your best option is to hit the gas momentarily and hope the trucks to the right and behind both brake so the one on the right can cut in just behind your accelerating rear bumper. A desirable outcome depends on coordinated action by the two truck drivers and you.
That’s the position in which the Fed finds itself. The truck drivers, Obama and Boehner, have headed their spending, taxing, and borrowing machine for a “fiscal cliff”. Bernanke’s speedometer shows percent annual inflation, and cruise control is set at 2%.
Ben: Adjust your target inflation rate to 4%, and don’t just “ease” – STOKE! John & Barack: Address the deficit, raise taxes and cut spending, but tie the implementation of these actions to the inflation rate. When Ben hits 4%, that’s the moment to change lanes. Employment goes up and the deficit comes down. If you upshift and downshift with skill & coordination, you can rescue the world’s economy.
The same recipe for success applies to Europe. The nations of that continent must marry growth and austerity in a delicate dance that involves the judicious application of monetary stimulus. Out of control inflation is to be avoided. But if the European Central Bank declares its target inflation rate as a way to reassure markets it does not intend to spur runaway currency devaluation, there are advantages to targeting that rate a couple ticks higher than where it’s been.
In January the U.S. Federal Reserve under Chairman Ben Bernanke made explicit its target inflation rate: 2%. But in a recession, at a time of limited growth and high unemployment, as our nation nears a “fiscal cliff” and as deficit spending spirals out-of-control, is a 2% target inflation rate too restrictive? Some, including Nobel Prize winning economist Paul Krugman, argue yes.
Krugman shouldn’t minimize the importance of a target inflation rate. Markets must have confidence that central bankers mean to protect the currency; without it, we will repeat the “stagflation” of the ‘70s. Yet we need stimulus to spur business growth (and spending), and ease unemployment. With that as our imperative, raising the target inflation rate to 4% is the right move for our times.
Germany, too hesitant to support monetary stimulus, is nevertheless right about the need to protect the value of the Euro and in its insistence on austerity measures to address the issues of debtor states. If nations don’t gain fiscal control, the rubber will eventually leave the road. Monetary stimulus with fiscal austerity is the needed correction. But what to call such a policy?
How about QSCA (kweska)? Quantitative Stoking and Coordinated Austerity, QSCA, signifies combining a proactive, pro-growth monetary policy with a fiscal policy that incorporates triggers tied to the inflation rate. When inflation hits 4% due to monetary stimulus, spending cuts and tax increases take effect. The classic Keynesian formulation is reversed in sequence. Rather than using fiscal policy as a stimulus and monetary policy to check inflation and fine-tune the system, QSCA uses fiscal austerity to check the inflation produced by monetary stimulus, making it possible to achieve deficit reduction without choking off growth.
QSCA is bold, coordinated economic action. For QSCA to be successfully implemented requires, first, a central bank with the tools, authority, and political backing to make bold moves; second, legislators who are onboard; and third, broad agreement as to how to understand economic indicators, such as inflation rate, and work with them as feedback instruments.
Dear neighbors, let’s stop wringing our hands about our economic predicament and lack of ability to do anything about it. Get behind a solution: advocate QSCA.