The economy remains bifurcated, with large firms - many making more money overseas than in the United States - continuing to perform well while the small-business sector, accounting for half of private gross domestic product and employment, languishes.
Policymakers remain divided over how to proceed. On fiscal policy, one side - largely Democrats and liberals - wants to maintain or increase government spending and finance it with higher taxes on "rich people."
The other side - largely Republicans and the more conservative - wants to trim government spending from record levels and lower tax rates, but with deductions eliminated. It also aims to reduce deficits and, ultimately, total debt and debt-service costs.
On monetary policy, one camp (Democrats/liberals) favors more stimulus from the Federal Reserve. The Fed buys assets from the private sector and creates liquidity, which has no return, so investors will look for ways to use the money and earn a return, buying stocks or investing in real assets.
The other side (Republicans/conservatives) worries about the threat of inflation and believes the Fed should hold its current position - its holdings of assets having increased from $900 billion to $2.8 trillion - or even raise rates. Lifting interest rates from historic low levels would improve the return for "savers."
Zero interest rates have not positively impacted the real economy yet, so more liquidity will not help. There is plenty of money available, but consumers and businesses have no use for it and are not borrowing and spending because of negative views about our economic circumstances.
It is a mistake to assume that very low interest rates will discourage savings substantially and increase spending. The return on saving appears to have little impact on the consumer decision to save, at least right now. Consumers save for "rainy days," to buy durable goods or a car. Or they save for college for their kids, or for their own retirement. The payoff for having money for these activities is what drives saving, not the interest rate on a certificate of deposit.
Business spending will not respond to the low interest rates because the outlook for the economy is poor, meaning there is no payoff for expanding business or increasing employment.
There is a further complication for small firms, which we are depending on to create much-needed jobs. Main Street firms often get their financing from Main Street banks, and these banks do not have access to all that "cheap money" the Fed is providing. Community banks collect savings from local consumers as their source of money. They can't issue their own bonds like the large banks can. This is expensive. As a consequence, most, if not all, have lending floors, usually around 5 percent).
Thus, even as the Fed pushes the yields on one-year Treasury securities to nearly zero, the average interest rate that small-business owners have been reporting on their 12-month loans has ranged between 6 percent and 6.5 percent since January 2009. That is down from 9.1 percent in January 2007, according to a survey by the 350,000-member National Federation of Independent Business.
It still comes down to confidence. There is plenty of money available to lend, but borrowers do not have a view of the future that will induce them to take risks. Cheaper money does not change the risk profile of future events and is not a heavy enough weight in the calculus of investing and hiring to matter much.
It is fiscal policy that presents the largest threat, as in Europe. The best "stimulus" policy will be a resolution of the debt spiral that has already ensnared Europe and now threatens to draw the United States into the same dangerous spot.