The words stabilization and stimulation encapsulate what the Federal Reserve and the Federal Government are trying to do to resolve the economic uncertainties. Entire textbooks have been written about each of these topics separately. I just want to introduce the concepts and open the door for numerous articles in the future.
Briefly, these words refer to: 1) stabilization of market prices and 2) stimulation of economic growth.
Congress has tasked the Federal Reserve with a “dual mandate” of achieving “full” employment and establishing stable prices. I will comment on their full employment mandate next.
The Fed uses several “tools” to try to achieve price stability. Whether or not these tools actually work is a topic for another post. I want to raise the question of whether or not we even want the Fed to attempt to stabilize prices.
Prices play an important role in the allocation of resources throughout the economy. They show producers where excesses and shortages exist. Any disruption of the information flow provided by the price mechanisms cannot benefit the economy. When the quantity of money changes artificially, false signals are sent to the market.
Do we actually want stable prices? Shouldn’t we let price changes signal the producers where shortages and excesses exist?
The second of the Fed’s dual mandate is the stimulation of economic growth. They attempt to do that by using the “tools” that I referred to above. They operate on the assumption that more money will have a positive effect on economic growth.
The Federal Government also gets involved in attempting to stimulate economic growth. The government bases its attempt to stimulate economic growth on the assumption that government spending (a euphemism for redistribution) positively benefits the economy.
Since the government produces no goods or services for the market, it must get its money from three sources: taxation, borrowing, and expanding the money supply. The first two of these sources simply redistribute economic resources, and the third disrupts the pricing mechanism.
How do the Federal Reserve and the Federal Government decide when and where the economy needs “stimulation?”
The idea that the Federal Reserve and the federal government, with little coordination, can establish “stable prices” and stimulate economic growth amounts a sort of sick joke.
What we call “the economy” really consists of a complex network of producers and consumers, each making individual decisions. Only those individuals know when their needs are satisfied.
The idea of the Federal Reserve and the Federal Government stabilizing and stimulating the economy makes as much sense as an orchestra conductor conducting an orchestra in which the instruments are located in separate cities.
We might refer to this orchestra as the “Bidenomics Band.”