Richard W Fisher: "Not to be used externally, but also harmful if
swallowed" - projecting the future of the economy and lessons learned
from Texas and Mexico
Remarks by Mr Richard W Fisher, President and Chief Executive Officer of the Federal
Reserve Bank of Dallas, before the Dallas Regional Chamber of Commerce, Dallas, Texas,
5 March 2012..
* * *
The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.
I have been asked to speak about the economy. I am going to take a different approach than
is typical for a Federal Reserve speech. I'll eschew making the prototypical forecast, except
to note that from my perch at the Federal Reserve Bank of Dallas, I presently see that: a.) On
balance, the data indicate improving growth and prospects for job creation in 2012. However,
the outlook is hardly "robust" and remains constrained by the fiscal and regulatory
misfeasance of Congress and the executive branch and is subject to a now well-known, and
likely well-discounted, list of possible exogenous shocks - the so-called "tail risks" - posed
by possible developments of different sorts in the Middle East, Europe, China and elsewhere.
And b.) While price stability is being challenged by the recent run-up in gasoline
prices - which has yet to be reflected in the personal consumption expenditure and
consumer price indexes but may well make for worrisome headlines when February data are
released - the underlying trend has been converging toward the 2 percent long-term goal
formally adopted by the Federal Open Market Committee (FOMC) at its last meeting.1
As to the outlook envisioned by the entire FOMC, you might wish to consult the forecasts of
all 17 members, which include those of yours truly, that were made public after the January
meeting - though I think a puckish footnote appended to the internal document laying out a
component of the December 1966 FOMC forecast might still apply: "Not to be used
externally, but also harmful if swallowed."2
Speaking of harmful if swallowed, I might add that I am personally perplexed by the
continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the
potential for further monetary accommodation - the so-called QE3, or third round of
quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities
and almost $848 billion in mortgage-backed securities on its balance sheet. When we
purchased those securities, we injected money into the system. Most of that money and
more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on
deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private
banks a measly 25 basis points in interest. A copious amount is being harbored by
nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of
nonfinancial businesses.
Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial
market operators keep looking and hoping for more. Why? I think it may be because they
have become hooked on the monetary morphine we provided when we performed massive
reconstructive surgery, rescuing the economy from the Financial Panic of 2008-09, and then
kept the medication in the financial bloodstream to ensure recovery. I personally see no need
to administer additional doses unless the patient goes into postoperative decline. I would
suggest to you that, if the data continue to improve, however gradually, the markets should
begin preparing themselves for the good Dr. Fed to wean them from their dependency rather
than administer further dosage.
I am well aware of the salutary effect of accommodative monetary policy on the equity and
fixed-income markets - remember, I am the only member of the FOMC who used to be on
the other side. My firms' record of substantially outperforming the equity and fixed-income
indexes over a prolonged period before I hung up my investment business and entered
public service in 1997 was achieved by focusing on the long-term fundamentals of the real
economy and the underlying value of the securities we purchased or sold - not by depending
on central bank largesse. Counting on the Fed to perpetually float returns is a mug's game.
From my present perspective on the side of the angels, as a member of the policymaking
team on the FOMC, I believe adding to the accommodative doses we have applied rather
than beginning to wean the patient might be the equivalent of medical malpractice. Having
never before pursued this course of healing, we run the risk of painting ourselves further into
a corner from which we do not know the costs of exiting. It is my opinion that we should run
that risk only in the most dire of circumstances, and I presently do not see those
circumstances obtaining.
So much for forecasting and monetary policy. Let me now walk you through an overview of
the Texas economy to set the stage for a broader discussion of what I believe continues to
bedevil a lasting recovery and more efficient job creation in the United States.
I will use some slides to illustrate key points.
The National Bureau of Economic Research, the arbiter of when recessions begin and end,
dates the onset of the Great Recession as December 2007. The economic performance of
Texas since December 2007 can be summarized with the chart projected on the screen. It
depicts employment growth in the 12 Federal Reserve districts. In the Eleventh Federal
Reserve District - or the Dallas Fed's district - 96 percent of economic production comes
from the 25.7 million people of Texas. As you can see by the red line, we now have more
people at work than we had before we felt the effects of the Great Recession. All told in
2011, Texas alone created 212,000 jobs.3
Only two other states can claim they surpassed previous peak employment levels: Alaska
and North Dakota.
Readers of this speech abroad - say, in Washington or New York - might think our growth
last year came only from the burgeoning oil and gas patch. They would be right to describe it
as burgeoning: 30,000 jobs were added in oil and gas and the related support sector last
year. Texas now produces 2.1 million barrels of oil per day, the same amount as Norway; we
produce 6.7 trillion cubic feet of natural gas a year, only slightly less than Canada.4
With 25 percent of U.S. refinery capacity and 60 percent of the nation's petrochemical
production located in Texas, we most definitely benefit from both upstream and downstream
energy production.
4
Texas compares with some international producers of oil and gas as follows:
Natural gas
Crude + natural gas liquids
(trillion cu ft, annual)
(mb/d)
World 84.60 119.39
United States 8.58 22.47
Canada 3.38 6.91
Texas 2.13 6.71
Norway 2.13 3.85
Mexico 2.95 1.72
SOURCE: Energy Information Administration.
And yet other sectors gained more jobs than the oil and gas sector and its support functions
in 2011: 58,000 jobs were added in professional and business services, nearly 46,000 in
education and health services and more than 41,000 in leisure and hospitality. Manufacturing
- which accounts for approximately 8 percent of total Texas employment - added over
27,000 jobs.
All told, the private sector in Texas expanded by 266,400 jobs in 2011, while the public
sector contracted by 54,800, due primarily to layoffs of schoolteachers. In sum, Texas
payrolls grew 2 percent, significantly above the national rate of 1.3 percent.
This performance is not unique to last year. As you can see from this graph of nonagricultural
employment growth by Federal Reserve district going back to January 1990, the Eleventh
District has outperformed the nation on the job front for over two decades. Note the slope of
the top line, which depicts job growth in the Eleventh District compared with each of the other
districts and, importantly, relative to employment growth for the U.S. as a whole - denoted by
the black line, the seventh one down.
As was pointed out in high relief by the media when a certain Texas governor was briefly in
the hunt for his party's presidential nomination, we do have some serious deficiencies in the
Lone Star State. We have a very large number of people earning minimum wage; we have
an unemployment rate that, while trending downward, is still too high, abetted by continued
inflows of job seekers from less-promising sections of the country. But I'll bet you that those
who constantly enumerate our deficiencies and are given to habitual Texas-bashing would
give their right - or should I say, left - arms to have Texas' record of robust long-term job
creation instead of the anemic employment growth of other megastates such as California
and New York. Or even the job formation record of many other countries! The following chart
shows that over the past two decades, the rate of employment growth in Texas has
exceeded that of the euro zone and its two anchors, Germany and France, as well as that of
two natural-resource-intensive countries with populations comparable to Texas', Canada and
Australia.
Now, is all this just prototypical Texas brag, or are there lessons the nation can learn from
the success that is enjoyed here? Texans are hardly given to modesty, but I believe there are
some undeniable lessons being imparted here.
One lesson I draw from comparative state data is that monetary policy is a necessary but
insufficient tonic for economic recovery. The Fed has made money cheap and abundant for
the entire country. The citizens of Texas and the Eleventh Federal Reserve District operate
under the same monetary policy as do our fellow Americans. We have the same mortgage
rates and pay the same rates of interest on commercial and consumer loans, and our
businesses borrow at the same interest rates as their brethren elsewhere in the country.
Which raises an important question: If monetary policy is the same here as everywhere else
in the United States, why does Texas outperform the other states?
The answer is no doubt complicated by the fact that Texas is blessed with a comparatively
great amount of nature's gifts, a high concentration of military installations and what some
claim are other "unfair" advantages.
But many of these "unfair" advantages are man-made: They derive from a deliberate
approach by state and local authorities to enact business-friendly regulations and fiscal
policy. For example, if you examine the differences between Texas and two states that have
been underperforming for a prolonged period - California and New York - you will note that
these former power states have less-flexible labor rules. Due to local taxes, differences in
zoning practices and myriad other factors, the cost of housing and the overall cost of living in
California and New York are significantly higher than they are here. And due to differences in
policies governing education, the scores measuring middle-school students' proficiency in
math are lower in both California and New York than they are in Texas, and in reading, are
lower in California and only slightly higher in New York.5
Taken together, these factors, alongside whatever natural advantages we may enjoy (though
it is hard to compete with the physical beauty of California and the Great Lakes region or the
cultural splendor of New York), affect where firms choose to locate and hire and where
people choose to raise their families and seek jobs.
I would argue that an additional factor favors Texas: We have a Legislature that under both
Democratic and Republican governors has over time deliberately crafted laws and
regulations, and tax and spending regimes, encouraging business formation and job
creation.
Just last month, Fairfield, Calif.-based vehicle reseller Copart Inc. announced that it will move
its headquarters to Texas, citing "greater operational efficiencies."6 The CEO for the owner of
Hardee's and Carl's Jr. restaurants, Andy Puzder, claims it takes six months to two years to
secure permits in California to build a new Carl's Jr., whereas in Texas, it takes six weeks.
These two anecdotes from California alone clearly illustrate that firms and jobs will go to
where it is easiest to do business - not where it is less convenient and more costly.
Both state and federal authorities need to bear this in mind as they plot changes in the fiscal
and regulatory policy needed to restore the job-creating engine of America. As an official of
the Federal Reserve charged with making monetary policy for the country as a whole, I am
constantly mindful that investment and job-creating capital is free to roam not only within the
United States, but to any place on earth where it will earn the best risk-adjusted return. If
other countries with stable governments offer more attractive tax and regulatory
environments, capital that would otherwise go to creating jobs in the U.S.A. will migrate
abroad, just as intra-U.S. investment is migrating to Texas.
Thus, even if one were to somehow have 100 percent certainty about the future course of
Federal Reserve policy and be completely comfortable with it, without greater clarity about
the future course of fiscal and regulatory policy and whether that policy will be competitive in
a globalized world, job-creating investment in the U.S. will remain restrained and our great
economic potential will remain unrealized.
I pull no punches here: We have been thrown way off course by congresses populated by
generations of Democrats and Republicans who failed the nation by not budgeting ways to
cover the costs of their munificent spending with adequate revenue streams. The thrust of
the political debate is now - and must continue to be - how to right the listing fiscal ship and
put it back on a course that encourages job formation and gets the economy steaming again
toward ever-greater prosperity. No amount of monetary accommodation can substitute for
the need for responsible hands to take ahold of the fiscal helm. Indeed, if we at the Fed were
to abandon our wits and seek to do so by inflating away the debts and unfunded liabilities of
Congress, we would only become accomplices to scuttling the economy.
I was in Mexico last week. Mexico has many problems, not the least of which is declining oil
production, low school graduation rates and drug-induced violence. But on the fiscal front,
the country is outperforming the United States. Mexico's government has developed and
implemented better macroeconomic policy than has the U.S. government.
Mexico's economy contracted sharply during the global downturn, with real gross domestic
product (GDP) plummeting 6.2 percent in 2009. But growth roared back, up 5.5 percent in
2010 and 3.9 percent in 2011, with output reaching its prerecession peak after
12 quarters - three quarters sooner than in the U.S. Mexico's industrial production passed its
prerecession peak at the end of 2010; ours has yet to do so.
Now hold on to your seats: Mexico actually has a federal budget! We haven't had one for
almost three years. Furthermore, the Mexican Congress has imposed a balanced-budget
rule and the discipline to go with it, so that even with the deviation from balance allowed
under emergencies, Mexico ran a budget deficit of only 2.5 percent in 2011, compared with
8.7 percent in the U.S. Mexico's national debt totals 27 percent of GDP; in the U.S., the
debt-to-GDP ratio computed on a comparable basis was 99 percent in 2011 and is projected
to be 106 percent in 2012. Imagine that: The country that many Americans look down upon
and consider "undeveloped" is now more fiscally responsible and is growing faster than the
United States. What does that say about the fiscal rectitude of the U.S. Congress?
Here is the point: As demonstrated by the relative and continued, inexorable outperformance
by Texas - which is affected by the same monetary policy as are all of the other
49 states - the key to harnessing the monetary accommodation provided by the Fed lies in
the hands of our fiscal and regulatory authorities, the Congress working with the executive
branch. As demonstrated by the fiscal posture of Mexico, a nation can effect budgetary
discipline and still have growth.
One might draw two lessons here.
The first comes from Germany's finance minister, Wolfgang Schäuble, who from my
perspective was spot on when he said, "If you want more private demand, you have to take
people's angst away" by having responsible and disciplined fiscal and regulatory policy.7
Clearly, there is less angst involved in conducting business in Texas.
The second is a broader, macroeconomic truism: that fiscal and regulatory policy either
complements monetary policy or retards its utility as a propellant for job creation. Mexico is
proof positive that good fiscal policy enhances the effectiveness of thoughtfully conducted
monetary policy, which is what the Banco de México - whose independence, incidentally,
was enshrined by a constitutional amendment in 1994 - has delivered under its single
mandate of inflation control and by applying the tool of inflation targeting.
I should be injecting some levity into the event, though it is hard to do so when one talks
about our feckless fiscal authorities. But there are witty people who have found a way to do
so. Take a look at this parody of Congress that my staff found on YouTube:
www.youtube.com/watch?v=Li0no7O9zmE.
There you have the prevailing modus operandi of our fiscal authorities: pass the bill rather
than the American dream to our children. What a sad tale!
You asked me to talk about the economy. In a nutshell, my answer is this: Monetary policy
provides the fuel for the economic engine that is the United States. We have filled the gas
tank and then some. And yet businesses will not use that fuel to a degree necessary to
realize our job-creating potential and create a better world for the successor generation of
Americans until Congress, working with the executive branch, does the responsible thing and
pulls together a tax, spending and regulatory program that will induce businesses to step on
the accelerator and engage the transmission mechanism of job creation so they and the
consumers they create through employment can drive our economy forward.