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Beyond the Beltway

The politics of paralysis: What the Fed and Iraq have in common

Iraqi troops training with the US Army June 2015. US Army/Reuters

On the face of it, Iraq and the US Federal Reserve share little.

One is a country plagued by division, war and mayhem since the US invasion of 2003. It is a brutal world where there are no friends, few allies and shifting interests. The other is a venerated, relatively tranquil institution where words, not arms or even money, are the true currency. And the words are measured, nuanced and gently spoken.

One deals with violence, fought in the desert over historic grievances. The other deals with greed, fought in the kind of plush boardrooms that few of us are ever privileged enough to visit.

So what could they possibly have in common?

Well, when it comes to American policies, the answer is quite surprising. They share at least one key attribute – an inability to change direction, for fear of the consequences. Call it the “paralyzed policies.”

Doing the same thing in Iraq and expecting a different outcome

Since the initial Iraqi invasion, the US has been mired in a regional conflict from which it appears unable to extract itself.

Clearly, the form of engagement has changed. George W Bush favored all-out conventional war, followed by stuttering, arguably naive attempts at nation-building. Before his departure from office, Bush did sign legislation requiring a full-fledged withdrawal by his successor – who turned out to be Barack Obama.

Electoral candidate Obama pledged to complete that withdrawal. But few believed that was possible. And that skepticism was vindicated.

President Obama did press ahead with the exit plan. But the seemingly inevitable chaos followed, and the president reversed his position, slowly and painfully reintroducing US troops.

The latest additions will increase that number to about 3,500. Many will bet that his successor, whether a Democrat or a Republican, will increase that number further. Many will debate whether there should be “troops on the ground.” But it is a debate that may be more rhetorical than substantive.

If the US provides special ops forces, trainers, air strikes, drones and arms, then at what point does it cross the increasingly blurred line between troops on the ground and logistical support?

In sum, the US has been sucked into never-ending commitment, one that extends beyond Iraq’s borders into the region as a whole.

Even Rand Paul, avowed proponent of neo-isolationism, now wants to fight ISIS.

So here is the paradox: the US has less need to engage in the Middle East as a protagonist because it has fewer interests to protect.

Fewer reasons to be in the Middle East

It is less dependent on Middle Eastern oil than it has been in decades. And this is not the Cold War. No other major power (pointedly China or Russia) is willing to fill the military vacuum created by American military withdrawal. What’s more, Iran’s evident regional ambitions can be boxed in by the US without Americans fighting wars across the region.

Yet the US is hooked. It has become inadvertently addicted to fighting in wars that are ostensibly conflicts between branches of Islam.

The US is an errant, albeit not innocent, interloper in that 1,000-year-old conflict. And, either directly or by assisting proxies, it is fighting on more fronts in the region than ever: from Afghanistan and Pakistan to Iraq and Syria; from Libya to Yemen.

And in so doing, the US is spending trillions of dollars – with no reasonable objective or withdrawal strategy in sight.

Insanity, they say, is doing the same thing and expecting a different outcome.

In sum, the abiding assumption remains that “we need to fight them there to avoid fighting them here in the US.” So American policy is to do the same thing. It just does so just in slightly different ways – from using combat troops to using drones – despite the fact that the war is expanding across the region.

It is hard to see the next American president, from among the current more electable candidates, conceiving a significantly different policy…for fear of the unknown consequences.

It is this fear of the unknown – and the paralysis that ensues – that ties the Fed and Iraq together.

Doing the same thing at the Federal Reserve and expecting a different outcome

The Fed. AgnosticPreachersKid, CC BY-SA

The Great Recession began in 2007. It presented the greatest threat to the function of the global economic system since the Great Depression, almost eight decades earlier.

True, we do have lesser economic crises far more often, such as the Asian Crisis in 1998 and the dot-com crisis three years later. But these were minor in comparison to the Great Recession.

American policymakers dating from Ronald Reagan had largely rid themselves of the financial tools to battle a depression.

Fiscal tools were eradicated. Monetary tools were the only things kept. So the Fed stepped in and armed with the tools of monetary policy essentially reduced its interest rate to zero in 2008 – at least for the banks and large-scale financial institutions.

The basic idea was that “cheap” money would galvanize economic growth. Lacking any other tools, the Fed started doing things it had never done before – bailing out Wall Street. The government called it “quantitative easing.”

Well, here we are, about eight years later. It is true that the official unemployment level has fallen to 5.4%. But that figure doesn’t reflect the fact that fewer people “participate” in work than for decades – a fraction under 63% – because many have given up looking for a job.

And the growth rate, after a healthy spurt last year, is again at anemic levels. It actually probably declined in the first quarter by 0.7% and will grow at only an estimated maximum of 2% this year.

Meanwhile, despite the Obama Administration’s best efforts, the rich have gotten richer and the poor have gotten poorer. That is in large part because inflation-adjusted wages for typical workers have stagnated for at least the last five years.

In other words, over seven years after the Great Recession began, we are still awaiting that sustained, vibrant burst of job, wage and gross national product (GNP) growth the US has historically experienced in the aftermath of such major crises.

Is monetary policy really the only solution?

Meanwhile, more Americans work only part-time or have given up looking; fewer get the kind of medical and pension benefits that their parents received; and fewer get annual pay raises than their parents.

Janet Yellen, Federal Reserve chairwoman, and her colleagues are the only game in town when it comes to providing tools that can regulate the US economy. And the only real

Janet Yellen. US Federal Reserve

instrument that they have to use at this point is the interest rate – which at this point can only go upwards. But they won’t even do that until the data are convincing.

So they sit and wait: for the official unemployment rate to edge down a just little lower; for salaries to increase just a little more; and for inflation to pick up just a little more.

In each case the actual targets are unspecified – because being more transparent would ensure they had to act. Yellen says her decisions are driven by the data. But things clearly aren’t getting better for the average American. I know because the data – on participation and jobs, wages and investments – tell me so.

In this case, action means raising interest rates. But Yellen and her colleagues, and arguable the US stock markets, have become addicted – in this case to cheap money.

They worry that any shift away could have unforeseen consequences – a fall in the value of housing or in stock market values; a rise in the value of the dollar or the US government deficit as more foreigners buy US treasuries. So they too are paralyzed.

So what should we do?

You may mistakenly believe that I am a pacifist or a fiscal conservative. I am neither. That I advocate an American withdrawal and a rise in interest rates. I want neither.

Or you may mistakenly believe that I am impatient, which I am not.

Clearly, President Obama wants others to shoulder the burden more in the Middle East. But just as clearly, he is getting slowly sucked back into that maelstrom in conventional ways.

The choice, we are effectively told, is between limited and full-scale war. Neither appears a winning strategy. Either way, the result is more money, more troops, and fewer options. But the consequences of over a decade of war are there for all to see.

I am not suggesting that the US sharply raise interest rates, either.

America’s poor and its middle class will primarily suffer from a shift away from cheap money. Houses will become more expensive to buy, more jobs may shift offshore and fewer Americans will achieve their dreams. In large part, the trouble is that the majority of Americans are unable to benefit from the rise in markets that has brought much prosperity to the minority.

But the only choice we are offered is cheap or more expensive money. Yet either way, it is a choice from which too few Americans benefit.

I am suggesting that it is time for America’s presidential candidates to embrace the notion of change for which America was once famous.

It is time for its policymakers to think more imaginatively. It is time for its government to utilize, or to create, tools that extend beyond the narrow confines of national security or private finance.

It is a time not simply to declare that “I can make 4% growth happen,” as Jeb Bush did last week, but to offer some innovative solutions.

The politics – and the economics – of paralysis have become an encumbrance that locks us in to the same old policies, even though the record firmly suggests that they are patently unable to achieve their prescribed goals.

No presidential candidate with an earthly chance of being elected has offered a vision for a new economy or a new national security policy that addresses America’s needs. Wouldn’t it be nice if at least one did?

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