Libertarian presidential candidate Gary Johnson is a friendly guy, seems pretty moderate. But he could tank the economy.
That’s what trying to balance the budget all at once would do. Which, of course, is what Johnson says he would. He wants to cut spending by 20 percent next year to get the government back in the black, and then veto any legislation that would make the red ink return.
This probably wouldn’t end well. The problem is the Federal Reserve might not be willing or able to really counteract this. In normal times, you see, the Fed cuts interest rates when the government cuts the deficit so that the private sector can pick up the slack for the public sector. The Fed can’t cut interest rates right now, because they’re barely above zero. Now, it’s true that the Fed could print money instead — that’s how it stopped austerity from starting a recession in 2013 — but Johnson doesn’t want the Fed to do that. He’s said that quantitative easing, which is when the Fed buys bonds with newly created dollars, is just an attempt to “override the free market” that will only lead to “malinvestment, inflation, and prolonged unemployment.” And since he would not only get to pick two Fed members in 2017, but also a new Fed chair in 2018, what he thinks matters.
The result, in all likelihood, would be a lot more unemployment. A little math can give us an idea just how much. Start with how Johnson is proposing an immediate fiscal tightening of 3 percent of gross domestic product. Without any monetary offset from the Fed, that would hurt growth by, well, something like 3 to 4.5 percent of GDP. That’s because there can be a multiplier on government spending. In other words, money that Uncle Sam doesn’t pay you is money you don’t have to pay someone else who, in turn, doesn’t have money to pay another person. If we use the rule of thumb that every percentage point the economy grows less than it should adds half a percentage point to the unemployment rate, then Johnson’s plan would probably push joblessness up somewhere around 6.5 to 7.25 percent.
A Fed audit, something else Johnson supports, wouldn’t be much better. This is one of those ideas that sounds better the less you know about it. The truth is that the Fed has already been audited, and already publishes a weekly report on its balance sheet. If you want to see how many mortgage and Treasury bonds it owns, that information is all there. Not that Johnson seems to realize it. He thinks that a Fed audit might cause a “worldwide panic” once people found out what’s on the Fed’s balance sheet, including, he falsely believes, stocks. Although that’s not the real impetus for all this. No, that’s “auditing” the Fed’s policy decisions so that politicians can try to browbeat it into doing what they want — which, in this case, is raising rates.
The irony is that it’s the libertarian who wants us to become, in Fed policy, like Europe. Except that instead of calling for us to give everyone Medicare or paid family leave, Johnson wants us to cut our budget and cut back on monetary stimulus like they did. It didn’t work there — the euro zone’s unemployment rate is still in double digits — and it wouldn’t here.
(Excerpted from O’Brien, Washington Post 9/22/16)