Matt Yglesias recently posted an article titled “America’s Economic Future Will Be Determined in America, Not Europe.” His main argument in the piece, that America is large enough to deal with any issues in Europe through policymaking, is certainly true, but I want to expand upon it as it relates to the presidential race. Yglesias is right when he says that “America’s economic future will be determined in America,” but more specifically, that economic future, and the U.S. presidential election, will most be determined by the Federal Reserve.
Yglesias writes, “Pundits looking for smart non-partisan things to say about the U.S. Presidential election have hit on the idea that the fate of the American economy, and perhaps therefore Barack Obama’s election, hinges on events in Europe.”
Ezra Klein’s morning Wonkbook yesterday was all about the idea that the American election will be determined by results in Europe. Many other writers have suggested similar thoughts.
In a Washington Post op-ed last Friday, Dana Milbank spelled out that thought process: “At worst, a severe downturn here will send the U.S. economy back into recession. Even at best, the inaction here may still cause enough drag on the U.S. economy to doom the incumbent’s reelection.”
But, as Yglesias argues, this ignores the idea that the U.S. can respond to any event in Europe with policies that keep that keep the American economy afloat and even speed up the recovery.
However, don’t look to Congress for help. There will not be any additional fiscal stimulus until after November, at the earliest. For conservatives looking for deregulation and austerity, there isn’t going to be any more of that either.
That leaves the Fed as the only actor capable of responding to events in Europe. If the Eurozone falls apart), the chairman of the Federal Reserve, Ben Bernanke, can respond by raising the Fed’s inflation expectations or announcing a third round of quantitative easing (when the Fed buys assets and thus injects money into the economy). He could also do nothing.
If the Eurozone doesn’t collapse, he still has all of those options at the table. Looser monetary policies would still speed up the recovery and tighter monetary policy would hold it back
If by some miracle, European leaders come to a grand agreement that brings about a euro zone recovery, it could boost the U.S. markets as well. As firms hire more workers, those workers will increase their spending and prices will rise. In such a scenario, Bernanke will still have all those policy options at his disposal. If it leads to slightly higher inflation, Bernanke could respond with tighter money and hold back the recovery. He could also accept that higher inflation and let the recovery happen.
This is all to say, Bernanke holds the keys to the economy. No matter what happens in Europe, the Fed can respond in one way or another and that response will have a major impact on the economy and thus, on Obama’s reelection chances.
Yglesias offers the analogy of car on a curved road with no guardrail, that the United States is the car and Europe the curved road.
“If you’re driving and the road curves and there’s no guardrail what you need to do is steer the car properly not complain about road engineering while your car goes off the cliff.”
Yes, but it’s Bernanke who holds the wheel. The American electorate, Barack Obama, and Mitt Romney are all just passengers, advising him to turn one way or the other. They can yell at the driver to steer, but they can’t do it themselves.
