In a recent Wall Street Journal op-ed column, Martin Feldstein – a well known economist of Reagan Administration fame – decries the Federal Reserve’s continued tax cuts as a solution to the imminent economic recession in the U.S. Feldstein argues that rate cuts will be ineffective at preventing a recession due to our fouled credit market and glut of unsold houses, while the cuts may worsen the food crisis in developing countries abroad.
How could U.S. interest rates at home possibly worsen food crises in countries like Egypt, South Africa, and Haiti? According to Feldstein, the interaction of lower Federal Reserve rates, inflation of food and energy prices, and central bank reactions in developing countries would all effectively reduce incomes in those countries. At the same time, riots have broken out in these same developing countries in response to high food and energy prices – global food prices alone have risen 83% in the last three years, according to the World Bank.
Feldstein’s column is an interesting study of the macroeconomics of Federal Reserve rate cuts, but it also highlights an important reality whether or not you agree with the details of his analysis: Our economy and economic policies are deeply intertwined with the rest of the world. China’s increased energy needs raise our oil prices. Our attempts to stem recession or replace gasoline with corn ethanol raise food prices in Egypt. Riots in Egypt raise uncertainty around oil supplies in the Middle East and raise our oil prices. The cycle repeats.
In this eternal season of U.S. presidential campaign rhetoric, Feldstein’s column points out the dangers of getting votes by promising simplistic and short-sighted domestic band-aids for problems like losing jobs oversees or high gas prices. Voters and candidates alike should keep in mind that many of our problems are harder – and more global – than they used to be. The world, it seems, is even smaller than we thought.
For Feldstein’s whole scoop and to test your macroeconomics literacy, see his column at the Wall Street Journal Online.
