TWO notable economic events happened this week – one you undoubtedly know about but the other you probably don’t.
You heard the Federal Reserve raised interest rates for the 11th time in little more than a year.
But you likely missed the fact that Congress was on the verge of passing a bill that would let victims of Hurricane Katrina tap into their 401(k) retirement plans without suffering a penalty.
How are these two events connected?
Over the past couple of years, I’ve been proposing that Washington do precisely what Katrina is now forcing it to do: Allow people to use their 401(k)s and other retirement plans penalty-free whenever there is an overriding national need.
In this case, Congress is apparently going to limit use of 401(k) money to people who were hurt by the hurricane. That’s a start. But the precedent shouldn’t stop there.
What I had in mind – and outlined more fully in an article co-written by economist Walter J. Williams for the Milken Institute Review – was a plan that would permit people to withdraw cash from nest eggs without suffering tax consequences if monetary policy and fiscal policy became impotent.
Along with taxes and interest rates, this manipulation of retirement savings would be the third leg of the national economic stool – a lot more stable than just monetary and fiscal policy alone.
I hadn’t even thought of natural disasters like hurricanes, only the unnatural ones that occur when politicians spend too much and sink the country so deeply into debt that tax cuts become impossible and cause even the Fed to lose control over rates. That’s exactly what is happening today.
The Fed did raise rates this week – but borrowing costs haven’t actually been going up.
In fact, after 11 rate hikes the cost of loans for consumers isn’t any higher than it was when Fed chief Alan Greenspan started tightening in June 2004.
The only rate that has increased is the symbolic federal funds rate, the level banks pay to borrow overnight in an emergency. (Big deal!)
If the Katrina precedent were followed, Washington would be able to unlock 401(k)s whenever the economy needs a boost, but not as big a kick in the pants as provided by rate and tax cuts.
And the opposite is also true.
When the economy needs to be slowed, taxpayers could be permitted to put more than normal into their nest eggs, which should cut back their spending.
If this third economic option had been available a few years ago, Congress might not have voted to give Americans tax rebates, which greatly increased the federal budget deficit. And the Fed could have avoided lowering rates to absurdly low levels.
Things would be a lot better today.