Government Programs Are Never “Temporary”

TND Guest Contributor:  Paul-Martin Foss |

IMF Managing Director Christine Lagarde is quoted as saying that unconventional monetary policy should only be of a “temporary nature” since it was implemented to deal with “specific issues and particular circumstances.” While we believe that these monetary policies never should have been implemented in the first place, it is nice to hear someone in the mainstream expressing the opinion that these policies should be ended. Unfortunately, “temporary” policies have an uncanny knack for prolonging themselves into permanence.

Just think of how many temporary programs or temporary taxes exist in the United States. One of the more famous is the federal telephone excise tax. Originally passed in 1898 to fund the Spanish-American War, it was renewed during World War I, then again during the Great Depression, and finally became a permanent tax, with only a partial repeal taking place in 2006. Greenbacks, the unbacked paper money issued by the federal government, were only supposed to be a temporary wartime measure during the Civil War, yet still managed to stick around for decades afterwards. And that precedent of unbacked paper money eventually led to the current monetary system we have today, in which unbacked paper money circulates as legal tender. Income tax withholding was another temporary wartime measure that remains with us today. Ironically, one of tax withholding’s main architects, Milton Friedman, is the source of the famous quip: “Nothing is so permanent as a temporary government program.”

The Federal Reserve’s lending facilities that were created in 2008 and 2009 were intended as emergency facilities and have since ceased functioning, but they were replaced by quantitative easing, or as Ben Bernanke preferred to call it “large-scale asset purchases.” These were also not intended to be permanent operations, but QE1 begat QE2 begat QE3, and now the Fed finds itself with a $4.5 trillion balance sheet, over 7 times larger than before the financial crisis. Rumors of even a miniscule rise in interest rates are enough to send stock markets into a tizzy, resulting in the Fed continuing to hold off on tightening monetary policy. Janet Yellen’s best guess is that “normal” monetary policy, meaning a normal-sized balance sheet, won’t return until probably the end of the decade. Given how previous Fed estimates of normalization would have had us back to normal by now, it should be fairly safe to say that envisioning a normalized balance sheet by the end of the decade is optimistic.

Financial markets have become junkies, addicted to seven years of super-easy money. Even the slightest hint of normalization and they go haywire. So many firms have gotten used to this accommodative monetary policy that many of them might well go under if the Fed were to remove the monetary heroin. There really are only two alternatives: muster up the courage to return to a saner, more normal monetary policy; or keep slogging along with a bloated balance sheet while only making incremental changes every several months. The former approach is like ripping a bandage off all at once; it’s painful at first but the pain subsides quickly. The latter is like removing the bandage slowly, only to find out that everything you’ve been doing that you thought was healing you has instead resulted in a festering, gangrenous wound that ends up killing you.

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About  Paul-Martin Foss:

Paul-Martin Foss is the founder, President, and Executive Director of the Carl Menger Center for the Study of Money and Banking, an Arlington, VA-based think tank dedicated to educating the American people on the importance of sound money and sound banking.

Prior to founding the Menger Center, Mr. Foss worked in the U.S. House of Representatives for seven years, including six years as Congressman Ron Paul’s legislative assistant for monetary policy and financial services, and one year as Deputy Legislative Director for Congressman Thomas Massie.

As Congressman Paul’s legislative assistant, he assisted the Congressman in his duties as Chairman of the Subcommittee on Domestic Monetary Policy by helping to develop hearing topics, agendas, and briefing Congressmen and their staffs on monetary policy topics. Mr. Foss also was responsible for the management of Dr. Paul’s monetary policy and financial services legislation, including the “Audit the Fed” and “End the Fed” bills, and was co-editor of Ron Paul’s Monetary Policy Anthology, a multi-thousand page compilation of hearing transcripts, lecture transcripts, and other documents related to Dr. Paul’s chairmanship.

Mr. Foss received his Bachelor’s degree from The University of the South (Sewanee), and Master’s degrees from the London School of Economics and Georgetown University’s Edmund A. Walsh School of Foreign Service.

This article appeared on the Carl Menger Center for the Study of Money and Banking and is reprinted with permission, “Creative Commons 4.0.”