Easier money hasn’t led to more growth, so we need still easier money.

Wall Street Journal

Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.

That’s the contradiction at the heart of the Fed’s latest foray into “unconventional policy,” which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. In the words of the immortal “Saturday Night Live” skit: We need “more cowbell.”

The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed’s balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.

The Fed’s goal is to push down long-term interest rates even lower than they are, to the extent that’s possible when the 10-year Treasury note is trading at 1.7%. The theory goes that this will in turn reduce already very low mortgage rates, which will help spur a housing recovery, which will lead the economy out of its despond. This has also been the theory for the last four years.

In case there was any doubt about its resolve, the Fed statement also issued a new implicit annual inflation target: 2.5%. The official target is still 2%. But the Open Market Committee stated that it will keep interest rates near zero, and by implication keep buying bonds, as long as the jobless rate stays above 6.5% and inflation stays “no more than a half-percentage point above the Committee’s 2-percent longer-run goal.”

That is a 2.5% inflation target by any other name, and it’s striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation. This is a victory for the Fed’s dovish William Dudley-Janet Yellen faction that echoes economists who think we have to inflate our way out of the debt crisis. Inflation remains quiescent, but central banks that ask for more inflation invariably get it.

These new overt economic targets are part of Mr. Bernanke’s campaign for more “transparency” in monetary policy, but they also have the effect of exposing how much the Fed has misjudged the economy. In January 2012, the Board of Governors and regional bank presidents predicted growth this year in the range of 2.2%-2.7%. On Wednesday, they predicted growth of 1.7%-1.8%, which means they are expecting a downbeat fourth quarter.

The Fed’s near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.

The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.

Mike takes on a Private Members Bill in Parliament – Bill C-377 that amends the income tax act…..

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a figure expected to rise to $129,800 in three years.

OTTAWA – A new report from Canada’s budget watchdog concludes the country’s 375,000 federal public servants have enjoyed a pretty good decade.

The paper from the Parliamentary Budget Officer shows the average public servant costs taxpayers $114,100 a year in total compensation, a figure expected to rise to $129,800 in three years.

What’s more, the PBO says compensation in the federal service has outpaced inflation and that of other employees — both in business and other levels of government — over the last 13 years.

“Total compensation (per full-time employee) in the federal workforce outpaced not only CPI (inflation), but also that of the Canadian business sector and provinces and territories over the study period,” states the report, which was released Tuesday.

Although the government has recently announced new restraint measures that will cut the number of public servants, the PBO estimates that average compensation for salaries and benefits will continue to grow on average by 4.4 per cent during the austerity program, schedule to wind down in 2014-15.

Canadian Taxpayers Federation federal director Gregory Thomas said he found some of the numbers “staggering,” particularly since average household income growth is in the neighbourhood of one per cent.

“This government has been in office for six years, you wonder when are they are going to get serious about controlling payroll costs,” he said.

“They’re controlling head count, they are not taking the big tough steps of confronting government employee unions and telling them they are making too much money.”

Another of the report’s surprising findings is that despite the stereotype of the public service as a stable work environment, compensation has fluctuated more regularly than is the case for the general workforce.

That’s because the period studied include years of deep cutbacks brought in the mid-1990s, a time the Liberal government of Jean Chretien was grappling with mounting federal debt.

For most of the period stretching into the early 2000s, compensation in the federal bureaucracy grew at a significantly lower rate than in the private sector, at times actually declining.

Since then, however, the public service has more than made up for lost time and has reached new heights in terms of number of workers and compensation.

Between 1999 and 2012, personnel costs per employee — or full-time equivalent using government terminology — rose by an average 5.1 per cent annually, more than twice the 2.1 per cent average annual inflation rate.

The growth in compensation was also well above the record in the business sector, where average annual compensation rose 3.3 per cent, and was also superior to the 3.8 per cent gain for employees working in provincial and territorial governments.

Even when the relatively lean years of the 1990s are included in the time horizon, federal employees come out ahead of their peers in provincial governments and in the private sector — so great have been the gains in recent years.

The report notes that federal compensation growth was not out of step with what happened in the federal bureaucracy in Washington, however.

Overall, the paper says Canada paid out $43.8 billion last year for about 375,000 employees, which includes the RCMP and military personnel.

In terms of number of workers, the public service hit its high water mark last year with about 380,000 total employees.

But the PBO paper notes that the March budget ushered in a new age of restraint, including freezing departmental budgets and calling for the elimination of 19,200 employees over the next three years. Ottawa recently announced it has already shed about 11,000 in the first six months of the program.

When the current austerity measures are completed, the public service will decline to 349,000, if Ottawa sticks with the program.

“The period between 2012-13 and 2014-15 resembles those of the mid-1990s, as both personnel expenses and federal employment (are) reduced,” the report states.

“The PBO expects a significant slowdown in personnel expenses, given assumptions about baseline employment.”

Compensation is expected to continue to grow, although not at the rate of the past 13 years.

The report projects that by 2014-15, the average annual compensation for a federal employee will rise to $129,800. About 72 per cent of the compensation is in salary and wages, while benefits, including pension plan contributions from Ottawa, make up the rest.

Part of the reason compensation grows even during restraint is that employees can still see salary increases from moving from the lower band of their scale to the higher. As well, the PBO says the composition of the public service is moving toward higher-paying classifications.

The PBO complains, however, as it has in the past, that it has not been given sufficient information about how the restraint program is being implemented, or its impact.

“As such, parliamentarians do not have the resources with which to determine areas of priority for resource distribution and the effects of the distribution on services provided to Canadians,” the report states.