Fiscal or Monetary Policy

   When it comes to helping a nation recover from an economic downturn, there are three options:
   -- Do nothing, and eventually the cycle will turn up again and all will be well.
   -- Have government increase its spending, offering contracts to businesses, which then hire more people and their wages spread the spending flow to the rest of society and the economy recovers.
   -- Urge the nation's central bank to lower interest rates by making more money available, which enables firms to invest in more production, which means more jobs and a greater quantity of goods, leading to lower prices, which encourages consumer spending.
   The latter, of course, can happen only if consumers have jobs and wages. That, in turn, depends partly on government efforts.
   This year, the issue of government spending has become prominent during the presidential election campaign, with both sides promising to push for more spending, even as some candidates promise budget cuts and lower taxes.
   Sorry guys, you can't have both. Moreover, Congress has been stalling infrastructure spending for several years, while the nation's roads, bridges, railroads and other facilities deteriorate for lack of maintenance spending.
   So in the absence of government spending to help the slow recovery, that leaves the Federal Reserve, as America's central bank, to work on option three, lowering interest rates by increasing the money supply.
   That is what the Fed has done over the past eight years, cutting its key interest rate to near zero, and the economy has responded. Slowly, but it has been recovering.
   But the issue of whether the recovery has been strong enough for a long enough period to enable the Fed to back off its policy of "quantitative easing" -- boosting the money supply -- has not yet been resolved.
   Therefore, at the most recent meeting of its Open Market Committee, the Fed decided to maintain the target rate for federal funds in the range of 1/4 to 1/2 percent.
   In the minutes of the meeting, held in late September, the Fed wrote that members of the Open Market Committee "generally agreed that the case for an increase in the policy rate had strengthened," but the FOMC will wait for further evidence of progress because of  "some slack remaining" in the labor market and inflation still below the Fed's target range of 2 percent.
   The unemployment rate nationwide has been holding at a shade below 5 percent.
   Some members, however, warned that waiting for too long could have adverse effects, which would force a stronger tightening of monetary policy too quickly. And that, they cautioned, could stall an already slow recovery.
   
   The bottom line is that the first option -- doing nothing -- is too dangerous, as shown by history.
   The second option -- fiscal policy, or government spending -- has been blocked by political partisanship.
   That leaves the third option -- monetary policy -- which is in the purview of the Federal Reserve Board. The Fed has been exercising that option, to somewhat limited success.
    
   In all, national economics should be viewed as a circle, and unless all the members in it -- consumers, businesses and government -- are aware of the benefits of cooperation and the dangers of ignoring other members, the economic cycle will go out of control and become a vicious cycle, with only one trend.
   Downward.