William Poole, a former president of the Federal Reserve Bank of St. Louis and now a distinguished scholar at the Cato Institute, penned a short commentary on November 24 for the Wall Street Journal where he makes a number of points worth elaborating on.
Poole correctly points out that the Fed influences the federal-funds rate, but does not control rates across the yield curve. He instead fingers the low-rate environment on non-monetary conditions, specifically the policies of the Obama Administration. As Poole mentions, "long-term rates reflect weak job creation and credit demand."
Disincentives to business investment, from poor tax policy and onerous regulations to a unstable dollar, have been the principal reasons why the economic environment has been so subpar relative to prior recoveries. The weak economy is the better explanation of why interest rates are so low.
Capital will always migrate to where it is treated best. Little wonder then that investors have not been so enamored with the U.S. in recent years.
Since 2008, there have been numerous significant tax increases, including hikes in the top marginal personal income, capital gains and dividend tax rates, limitations or phase-outs of personal exemptions and itemized deductions for high-income taxpayers, and a new Medicare tax on investment income.
The U.S. corporate tax rate is among the highest in the developed world. While many countries in the OECD have reduced corporate tax rates in recent years, the U.S. has stood pat. The U.S. is also one of only a few countries that utilizes a territorial tax system which taxes income earned outside of the home country. This has resulted in massive amounts of cash held offshore as U.S.-based multinationals are loathe to repatriate the funds and pay the higher rate.
The uncompetitive corporate tax structure is also cited as a major reason that U.S. multinationals are choosing to relocate to foreign domiciles via corporate inversions.
Politicians in Washington D.C. continue to talk a good game about tax reform, but progress on simplifying the tax code by lowering the rate and eliminating deductions has been glacial. The corporate tax would ideally be eliminated, but that is a topic for another day.
To say that the "fourth branch of government", the regulatory state, has expanded in recent years would be an understatement. It has been hyperactive. The EPA, FDA, FCC, and a plethora of other regulatory agencies have been spitting out burdensome regulations on business at a rapid pace. Combined with the impact of major pieces of legislation, signed into law without much of the details written, such as Dodd-Frank and Obamacare, it is fairly easy to see why businesses may take a more cautious view on investment spending. Economist Bob Higgs coined it "regime uncertainty".
I am quite critical of the Fed's hubris and hope to see it dissolved in my lifetime, but I believe that many commentators, pundits, and investors give this institution far too much credit when it comes to "setting" interest rates or "managing" the economy. [Please see John Tamny's recent commentary on the Fed, "The Fed Can't Spot Nor Can It Stop 'Bubbles,' Nor Should It Try."]
Interest rates are the pricing mechanism in the capital markets, equilibrating the supply and demand for credit. Indeed, rates are being "manipulated" but put the blame where it belongs. The poor fiscal and monetary policies of the Obama Administration with ineffective pushback by the Republican-controlled Congress are the prime culprits. Big Government is a prosperity deterrent. Low interest rates simply reflect this reality.
The uncompetitive corporate tax structure is also cited as a major reason that U.S. multinationals are choosing to relocate to foreign domiciles via corporate inversions.
Politicians in Washington D.C. continue to talk a good game about tax reform, but progress on simplifying the tax code by lowering the rate and eliminating deductions has been glacial. The corporate tax would ideally be eliminated, but that is a topic for another day.
To say that the "fourth branch of government", the regulatory state, has expanded in recent years would be an understatement. It has been hyperactive. The EPA, FDA, FCC, and a plethora of other regulatory agencies have been spitting out burdensome regulations on business at a rapid pace. Combined with the impact of major pieces of legislation, signed into law without much of the details written, such as Dodd-Frank and Obamacare, it is fairly easy to see why businesses may take a more cautious view on investment spending. Economist Bob Higgs coined it "regime uncertainty".
I am quite critical of the Fed's hubris and hope to see it dissolved in my lifetime, but I believe that many commentators, pundits, and investors give this institution far too much credit when it comes to "setting" interest rates or "managing" the economy. [Please see John Tamny's recent commentary on the Fed, "The Fed Can't Spot Nor Can It Stop 'Bubbles,' Nor Should It Try."]
Interest rates are the pricing mechanism in the capital markets, equilibrating the supply and demand for credit. Indeed, rates are being "manipulated" but put the blame where it belongs. The poor fiscal and monetary policies of the Obama Administration with ineffective pushback by the Republican-controlled Congress are the prime culprits. Big Government is a prosperity deterrent. Low interest rates simply reflect this reality.
No comments:
Post a Comment