Is A ‘Tight’ Federal Reserve The Cause Of Buffalo, NY’s Malaise?
Buffalo, New York is seemingly the picture definition of “rust belt.” Once extraordinarily prosperous (Goldman Sachs used to have an office there), the industries that lifted it long ago are no longer relevant. We generally only hear about it during the NFL’s regular season or when someone tells us they’re from Buffalo. Raise your hand if you’ve ever met someone who is moving to Buffalo.
Importantly, the opinions offered above are hardly a speculation. Census statistics reported on by the New York Post last week indicate that Buffalo has lost an average of 51 residents per day since 2010. Again, we generally only meet people from Buffalo.
Ok, so why is Buffalo’s economy so weak? To believe the commentary at the moment from conservatives who surely know better, and who will know better once a Democrat is in the White House, Buffalo has a Fed problem. Money is too “tight” in western New York, which means the economy is sagging. Up front, someone who hasn’t bothered to consider the why behind money would say Fed obsessed conservatives have a point. Figure that so-called “money supply” is rather slight in Buffalo.
Except that anyone with a pulse would then deduce the actual why behind relatively scarce money supply. There’s very little there because there’s very little production in the once prosperous city. Money isn’t a driver of economic growth, rather it’s a consequence of it. You can’t eat money, and while some have doubtless slept with it, money only has a purpose insofar as it facilitates the exchange of market goods, services or labor, or as a way of pushing accession of goods, services and labor into the future (investment).
Stating the obvious, increased “money supply” from the central bank with an eye on stimulating economic growth is a screaming non sequitur. Money is again a consequence of economic growth. It’s abundant where there’s production simply because we produce in order to get. Money is just an agreement about value that facilitates exchange of real things, or the future accession (once again, investment) of real things. Money supply is scarce in Buffalo precisely because there’s very little production to trade. Assuming the Fed pumped dollars into Buffalo banks through bond purchases, the money would exit Buffalo and its environs as quickly as it arrived. Since resources generally never sit idle, neither does money. It flows to where there are resources to exchange.
Which brings us back to the conservative line of the moment about the U.S. economy. Supposedly it’s beginning to sag, and the Fed is the source of the weakness. To hear conservatives say it, the Fed is too “tight.” Ok, on its own such a line of thinking is just silly. Credit is a global concept since resources are produced globally, so any “tightness” allegedly created by the Fed would be made up for by non-U.S. credit sources that would desire exposure to an economy that conservatives have long claimed is amazing. Or one they used to claim was amazing. Or one they regularly claim is amazing when they’re not blaming the Fed for somehow making it less amazing.
It doesn’t insult conservatives nor does it put words in their mouths to say that they’ve been saying the economy has taken a sharp turn in the right direction ever since Trump got into office. There has been regular commentary about the U.S. economy being the “best in a generation,” plus on Friday in the Wall Street Journal Andy Puzder relayed to readers that the economy is the best it’s been in over a decade. Ok, but if true then logic dictates that there wouldn’t be a problem of credit or “money supply.” Where there’s growth, money and credit are everywhere. Indeed, while there’s little activity and little “money supply” in Buffalo, there’s tons of each in Palo Alto. Well, of course. The economy is booming there. Does anyone seriously think, particularly in consideration of how globalized is investor interest in Silicon Valley, that the technologists and VCs out there are watching the Ms that so excite the overnight monetarists in the conservative camp?
Back to reality, if you’re productive you needn’t worry about “money supply.” Money sources will beat a path to your door. Money finds growth. Always. The idea that the Fed could limit credit firstly presumes that the Fed can create it (it can’t), but also that access to resources (credit) is something regulated by a governmental body on Constitution Avenue in Washington, D.C. That’s just not serious. If Fed “tightness” were the source of U.S. economic weakness, then it would also be true that Fed “looseness” in places like Buffalo could fix what ails it. No. That’s just silly. Buffalo sags because investment is the source of economic growth, and investment follows people. The problem is that Buffalo’s best and brightest keep moving from there, as opposed to working there. What’s serious is that the Fed can’t alter reality, not in Buffalo and not in Palo Alto. Resources flow to their highest use. Money is once again just an agreement about value that facilitates the exchange of the fruits of productive activity. Extra “money supply” created by the Fed for the U.S. economy will serve no purpose if the economy is weakening (as conservatives occasionally speculate) in much the same way that it would serve no purpose in western New York.
But since conservatives are convinced the Fed is too “tight,” and since they’re using allegedly falling commodity prices to make this case, it’s worth addressing that argument while stating up front that the dollar’s commodity value or its exchange value versus other currencies has never been part of the Fed’s portfolio. Second, there’s little correlation between alleged Fed parsimony, ease and the dollar’s commodity and/or currency value as is. The dollar collapsed amid soaring Fed rates in the 1970s, and it revived in the ‘80s and ‘90s despite falling Fed rates. Conservatives are strangely convinced of what’s easy to disprove.
Still, let’s look at the dollar price of gold when President Trump entered office. Back then gold was trading at roughly $1,200/ounce. Today it trades at roughly $1,330/ounce. Oil? It was in the low $50s then, and it is now. Commodities certainly are an excellent signal of the dollar’s condition, but conservatives have blamed an overly strong dollar allegedly made strong by Fed “tightness” for the supposedly weakening economy, they’ve cited gold and oil specifically, but the dollar is quite a bit weaker versus gold since January of 2017 when Trump entered office.
All of this matters when we remember that Trump partisans have once again been cheering the Trump economy as the “greatest in a generation” since not long after he entered office. And while their exuberance is arguably overstated, the Trump economy has been good. He signed a tax cut (not nearly large enough, too focused on middle earners, not focused enough on high earners who are the source of growth), he’s been a ferocious deregulator, and while he’s gotten a weaker dollar contrary to what we’re told, the dollar hasn’t collapsed. Trade policy has been bad, but hopefully it doesn’t get out of hand.
The main thing is that conservatives can’t have it both ways. The Trump economy can’t have been amazing, and then suddenly bad overnight. This is particularly true when they’re blaming a strong dollar, “deflation,” and all of a sudden a “tight” Fed (umm, it’s been raising rates for years, including when the Trump economy was soaring) on an allegedly weakening economy. Sorry guys, the dollar is quite a bit weaker relative to when Trump got into office, and when the economy took off.
Basically the conservative argument against the Fed is backwards. Not only can the Fed not stimulate economic growth, not only does it not target the dollar’s value, the abilities ascribed to the central bank about its power to stimulate through devaluation don’t stand up to the fact that the dollar has fallen versus gold, not risen since Trump entered office. And since conservatives correlate dollar weakness with Fed looseness, as opposed to tightness, it’s time that they rethink an always easy-to-disprove argument.
And it’s time they exit their devaluation stance. Investment is what drives growth, and a weak dollar is a tax on investment. In their odd jawboning of the Fed, conservatives inside and outside the Trump administration are calling for the very dollar weakness that has a brilliant track record when it comes to bringing about the slow economic progress that conservatives claim they want to avoid.
John Tamny is a Forbes contributor, Director of the Center for Economic Freedom at FreedomWorks, editor of RealClearMarkets, and a senior economic adviser to Toreador Research & Trading. He’s the author of “Who Needs the Fed?” (Encounter 2016), along with “Popular Economics” (Regnery, 2015).