Contrary to the expectations of many economists and financial market professionals, the U.S. economy seems to be growing reasonably well. In the third quarter of 2013, growth was 4.1%. For a mature, industrial economy, a 4.1% rate is good. The Cassandras among pundits warn that it can't last. They could be right--but they also could be wrong.
When one looks at what would impel further growth, many of the usual suspects don't seem to be helping much. Business investment is tepid. Income growth in the aggregate is even more tepid. Only the the top few percent have no fear of the Grinch this Christmas. The federal government is reducing its spending growth--primarily due to sequestration, but even the new budget deal doesn't offer major spending increases. U.S. exports have been an economic bright spot the last few years, but America isn't an export driven nation and exports can't turn the economy around by themselves.
What, then, could be producing the growth? The Federal Reserve's accommodative policies no doubt play a role, although much of the case for reducing quantitative easing is that its marginal impact is diminishing, and very possibly evaporating. The Fed hasn't done anything lately to produce a growth spurt. Its primary role has been to keep a thumb in the dike until other forces cause the economy to perk up.
But one factor to bear in mind is that America may be starting to enjoy a peace dividend. The end of major wars is almost always followed by a period of prosperity. The Civil War was followed by the rapid growth of the Gilded Age. World War I was followed by the Roaring Twenties. World War II was followed by decades of prosperity. And the conclusion of the Cold War in 1990 was followed by the prosperity of the 1990s. Only the end of the Vietnam War wasn't followed by a growth spurt, and that might well be attributable to the oil price shocks administered by OPEC, which transferred a great deal of wealth to oil producers and away from the consumers who comprise two-thirds of the U.S. economy.
Even though America remains embroiled in seemingly never-ending conflict, we have a peace dividend in the offing. The war in Iraq is over. The war in Afghanistan is winding down. Although U.S. military and security personnel continue to confront challenges in the Middle East, Africa, Asia and Latin America, none of them involve the expenditure of hundreds of billions of dollars, as did the recent Iraq and Afghan wars. Large amounts of America's wealth that were being spent on weapons and fighting overseas can now be shelled out for double bacon cheeseburgers, big screen TVs, three-quarter ton pickup trucks, smart phones, Legos sets, kitchen re-modelings, really big cups of soda in New York City, vacuous tattoos, frisbees, pre-mixed cocktails, trips to Graceland, and doggie pedicures. And a lot of other stuff as well. Giving peace a chance could be the best federal economic policy of the times. Even though there surely will be ups and downs in the economy in the coming years, the peace dividend offers a powerful reason to hope for the best.
Sunday, December 22, 2013
Wednesday, December 18, 2013
Beginning the Taper: What Fed Policy Change?
The Federal Reserve announced today that it will begin to taper its purchases of Treasury securities and mortgage-backed securities. Starting in January, it will purchase each month $40 billion of Treasuries and $35 billion of mortgage-backs, instead of $45 billion and $40 billion, respectively. A $10 billion drop from $85 billion per month. Whoop-de-do. That's barely a drop in the bucket. Yet, after the announcement, the Dow Jones Industrial Average jumped almost 300 points. A 1.84% increase in the Dow because of a reduction in central bank accommodation? Financial news stories attributed the stock market rise to a belief that the Fed was signalling that the economy was improving faster than expected. But there's a much simpler explanation for the exuberance in stocks.
The Fed said that it was likely to keep short term interest rates at zero for "well past" the time when unemployment fell below 6.5%, its previously announced benchmark for starting to raise short term rates. This is a significant change from previous statements. It means that the Fed will keep short term rates at zero for a really long time, and it's not saying how long. Could be forever, since the Fed didn't announce a new unemployment benchmark for raising rates.
The promise of ultra cheap money indefinitely is to stocks like pouring gasoline onto a fire--instant exuberance. What the Fed did today was give back with the right hand what it took with the left, and then some. It's fair to say that the Fed increased net central bank intervention today. The sharp jump in stocks is consistent with that view. The relatively minor change in bonds is as well.
But are we surprised? Did we really think the Fed was going to step out of the picture in a meaningful way? American businesses and investors have become addicted to heavy doses of monetary methadone from the central bank. If the Fed began to actually step back, the market would have tanked.
What happened today is the Fed switched from wearing a blue tie to a paisley tie. But the change was cosmetic, and net result was more Fed accommodation. Oh, well. Plus ca change, plus c'est la meme chose.
The Fed said that it was likely to keep short term interest rates at zero for "well past" the time when unemployment fell below 6.5%, its previously announced benchmark for starting to raise short term rates. This is a significant change from previous statements. It means that the Fed will keep short term rates at zero for a really long time, and it's not saying how long. Could be forever, since the Fed didn't announce a new unemployment benchmark for raising rates.
The promise of ultra cheap money indefinitely is to stocks like pouring gasoline onto a fire--instant exuberance. What the Fed did today was give back with the right hand what it took with the left, and then some. It's fair to say that the Fed increased net central bank intervention today. The sharp jump in stocks is consistent with that view. The relatively minor change in bonds is as well.
But are we surprised? Did we really think the Fed was going to step out of the picture in a meaningful way? American businesses and investors have become addicted to heavy doses of monetary methadone from the central bank. If the Fed began to actually step back, the market would have tanked.
What happened today is the Fed switched from wearing a blue tie to a paisley tie. But the change was cosmetic, and net result was more Fed accommodation. Oh, well. Plus ca change, plus c'est la meme chose.
Tuesday, December 10, 2013
Barack Obama's Curious Redistribution Ideas
President Obama recently spoke critically of the gap between the rich and the poor. He has endorsed an increase in the federal minimum wage, from $7.25 up to $10.10. He has argued for stronger enforcement of the labor laws. He seeks universal pre-school.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Predictably, Republicans stood in opposition. More government spending isn't the answer, they contend. Economic growth is the tide that will lift all boats, they say.
Republicans, whether they are right or wrong, have nothing to worry about. Barack Obama, whatever he may say, isn't really serious about changing the distribution of income or wealth. He favors reducing the cost of living adjustment for the Social Security, military and federal retirement benefits that tens of millions of Americans depend on. Cutting back on retirement benefits worsens the distribution of income and wealth.
There were some federal tax increases that took effect this year. But the income tax increase on high level earners was accompanied by an increase in Social Security taxes (which are regressive). So what was the net effect? Most likely, very little or no redistribution.
The Affordable Care Act would have a redistributive effect because of its health insurance subsidies for low income participants. If only people could enroll . . . .
Barack Obama has serious credibility issues. He drew a line in the dust over the use of poison gas, and Assad stepped over it. Obama squirmed, complained, and then let the Russians broker a deal. He didn't have the management skills to implement his signature legislative achievement, the Affordable Care Act. He negotiated some sort of deal on nukes with Iran, although that deal seems to have implementation issues as well. As negotiators talk, Iran continues to enrich. If you're looking for action from the White House on redistribution of income or wealth, don't hold your breath. Keep saving and investing, because you're on your own.
Thursday, December 5, 2013
A World of Foreign Policy Gambles
It is almost axiomatic that when a political leader faces domestic problems, he or she will turn to foreign relations as a way to divert disgruntled constituents from their daily travails. Appeals to national pride easily tap into the often reflexive patriotism that many people have. Folks tend to rally 'round the flag whenever there's a dustup with some bunch of dang foreigners. Since foreign relations tend to be largely in the domain of Presidents, Prime Ministers and other national executives, legislative interference is less of a problem and credit for success can be hoarded.
With essentially all of the world's major economies unimpressive, sluggish or even tending toward torpid, it's hardly a surprise that some world leaders are indulging in cross-border shenani . . . , well, activities. China has a slowing economy, with a real estate bubble, a debt bubble, increased competition from lower wage nations around the world, growing unemployment, a lack of high-value innovation, and a demographic demon of too many elderly and way too few young workers that's far, far worse than America's social security issues. So what does China do? Make noise about territorial claims in the East China Sea and South China Sea. America responds by flying B-52s into an area claimed by the Chinese. The Japanese, with a sludgy economy and a recently elected Prime Minister, Shinzo Abe, who appears to be of a nationalistic bent, contest the Chinese claims with their military aircraft, sabre-rattling as good as they've been rattled at. Japan and China are quietly drifting into an arms race, while the U.S. military is expanding its presence in Asia. And of course, there's North Korea, an economic dead zone, which engages in virtually nonstop sabre-rattling to legitimize its autocracy.
Meanwhile, in the Middle East, a newly elected Iranian leadership faced with a sanctions-hammered economy that's circling the drain, are suddenly open-minded about a deal to slow down their nuclear program. An American President, crippled by the virtual non-launch of his showcase domestic health insurance program, decides it's okay to let Iran continue to enrich uranium up to the 5% level, even though this isn't exactly a complete freeze of Iran's nuclear program. (Even though Iran says it wants to have 5% uranium to develop nuclear power, since when does a country with gobs of petroleum reserves need to develop nuclear power?) This deal could be seen as an effort by the U.S. to reduce its presence in the Middle East (so it can increase its presence in Asia). Does that make war in the Middle East less likely? Or will the increasingly nervous Israelis act on their own, as they have in the past? And if they do, will America be militarily dragged into the consequences?
Over the past century and a half, foreign policy adventurism has tended to end badly. Sometimes, very badly, with 20 million dead in World War I and 60 million dead in World War II. This isn't to suggest that America and other nations should become isolationist. The world is interconnected and some degree of international engagement is necessary. But citizens should be skeptical of their leaders, who often have much to gain by stepping up their rhetoric and actions. The recent popular outcries against American and British military action in Syria over its use of poisonous gas is an example of how the levelheadedness of the citizenry can cool the jets of a handful of very powerful people who may spend too much time talking to each other. If a nation's leader seems to have a gambling problem in the foreign policy arena, citizens should stage an intervention.
With essentially all of the world's major economies unimpressive, sluggish or even tending toward torpid, it's hardly a surprise that some world leaders are indulging in cross-border shenani . . . , well, activities. China has a slowing economy, with a real estate bubble, a debt bubble, increased competition from lower wage nations around the world, growing unemployment, a lack of high-value innovation, and a demographic demon of too many elderly and way too few young workers that's far, far worse than America's social security issues. So what does China do? Make noise about territorial claims in the East China Sea and South China Sea. America responds by flying B-52s into an area claimed by the Chinese. The Japanese, with a sludgy economy and a recently elected Prime Minister, Shinzo Abe, who appears to be of a nationalistic bent, contest the Chinese claims with their military aircraft, sabre-rattling as good as they've been rattled at. Japan and China are quietly drifting into an arms race, while the U.S. military is expanding its presence in Asia. And of course, there's North Korea, an economic dead zone, which engages in virtually nonstop sabre-rattling to legitimize its autocracy.
Meanwhile, in the Middle East, a newly elected Iranian leadership faced with a sanctions-hammered economy that's circling the drain, are suddenly open-minded about a deal to slow down their nuclear program. An American President, crippled by the virtual non-launch of his showcase domestic health insurance program, decides it's okay to let Iran continue to enrich uranium up to the 5% level, even though this isn't exactly a complete freeze of Iran's nuclear program. (Even though Iran says it wants to have 5% uranium to develop nuclear power, since when does a country with gobs of petroleum reserves need to develop nuclear power?) This deal could be seen as an effort by the U.S. to reduce its presence in the Middle East (so it can increase its presence in Asia). Does that make war in the Middle East less likely? Or will the increasingly nervous Israelis act on their own, as they have in the past? And if they do, will America be militarily dragged into the consequences?
Over the past century and a half, foreign policy adventurism has tended to end badly. Sometimes, very badly, with 20 million dead in World War I and 60 million dead in World War II. This isn't to suggest that America and other nations should become isolationist. The world is interconnected and some degree of international engagement is necessary. But citizens should be skeptical of their leaders, who often have much to gain by stepping up their rhetoric and actions. The recent popular outcries against American and British military action in Syria over its use of poisonous gas is an example of how the levelheadedness of the citizenry can cool the jets of a handful of very powerful people who may spend too much time talking to each other. If a nation's leader seems to have a gambling problem in the foreign policy arena, citizens should stage an intervention.
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