Growth is never by mere chance; it is the result of forces working together. ~ James Cash Penny
Economic growth – the expansion in
a nation’s real (inflation-adjusted) gross domestic product (GDP) or its real GDP
per capita – has long been one of many nations’ principal macroeconomic goals. There
are many paths for achieving greater growth that politicians, economists and
citizens often quarrel about.
Such bickering is happening now,
with less than 2 weeks before the midterm elections. Should tax cuts be
provided to the wealthy or to the middle-class; should government expenditures
be increased or decreased? Do such policies actually make a difference; and if
so, how long does it take for them to take effect?
Adam Smith’s renowned Wealth
of Nations (1776) emphasized that the “division of labor” is at the heart
of rising wealth and prosperity. Such division referred to workers specializing
in various productive tasks, rather than each worker making the entire product.
Early on, the book provides a description of how ten (10) workers in a pin
factory can make 48,000 pin a day if they specialize, but perhaps only one pin per
worker every day if each produces the pin completely by himself.
The Industrial Revolution in
large part was founded on Smith’s concept of labor specialization, along with
its accompanying technological progress, rising education levels and more
productive capital stock. After centuries of Malthusian economic stasis, many
people’s lives were economically improved beginning in the latter 19th
century.
In the intervening centuries numerous
routes for economic growth have been tried. Some are not viable. The most
recent example is the shellacking received by Liz Truss, then Britain’s still
wet-behind-the-ears prime minister (PM). Her plan to abolish England’s highest
tax rate on top-earning Brits in the name of stronger growth without
compensatory government funding proved economically treacherous and politically
expensive. She was forced to publicly abandon it within 10 days of its conception.
Her attempt proposed creating a
2022 version of “trickle-down” macroeconomic growth – famously undertaken twice
by President Reagan. As has happened previously, trickle-down upset too many
folks and more importantly, proved ineffective in practice. Like many things, the
Repubs have never accepted the empirically-proven result that trickle-down has
never delivered broad economic growth.
The stress on PM Truss grew overwhelming.
She did not survive. Her tenure lasted a mere 45 days (or by other accounts 44
days, take your pick). Her opening economic policy missteps put her government
in a deep, inescapable hole. Ms. Truss’s trickle-down will no longer dribble. The
brand new PM, Rishi Sunak, will be Britain’s third in just seven weeks. He is
expected to offer more mainstream macroeconomic policies to combat high inflation
and other economic challenges. He’ll need considerable luck.
Last year, our real GDP grew impressively
at 5.67%, the highest annual growth since 1984. That will not be repeated this
year; through June 2022 real GDP dropped 0.3%, which is never a good sign for
the incumbent party.
The Biden administration has
offered several large, multi-faceted programs to prolong US economic growth,
such as an expanded $1.0 trillion (T) for infrastructure, $400 billion for cancelling
students’ college debt as well as limiting the price of insulin. These efforts may
be worthy, but the president’s timing is dreadful. Why? Because in September,
the consumer price index rose at a rarified 8.2% annual rate.
Pleasing voters before this
election can be politically beneficial, but economically exorbitant. In fact, the
economic legislation that our current Congress has passed accounted for $1.45T
of new spending. Interestingly, these massive outlays represent only 33% of
what the president initially requested in his 2022 budget. Given their size and
breadth, let’s hope some growth endures through these expenditures without
strengthening inflation.
Unfortunately, such expanded
fiscal policy expenditures now are clearly at odds both with the Federal
Reserve’s significant tightening of monetary policy and with taming our enduring
high inflation. Such increases in government spending likely will stimulate
demand for more goods and services, resulting in higher prices.
How long will it take for the Fed’s
anti-inflation increases in interest rates to reduce our damnably relentless inflation?
No one knows, except too long. Which means the Federal Open Market Committee (FOMC)
will assuredly increase the interest rate at its upcoming November 1-2 meeting.
It’s very unlikely but the FOMC could reduce the interest rate rise by a sliver
under the 0.75% increases its effected at the past 3 meetings. Such a minor
change might please the markets, if that means anything to the Fed.
Despite the Dems’ considerable efforts
to focus on the Repubs’ horrendous abortion policies and extremism, potential voters
have listed inflation as the number one issue they are facing. Understandably,
folks want prices to stop rising for items they buy in every grocery store isle
(11.2% annual price increase) as well as energy (19.8%) and virtually all other
goods and services.
The simultaneous combination of lackadaisical
growth with inflation is termed stagflation by economists. Stagflation is the
worst of both issues. Macroeconomic policies to resolve a lack of growth – such
as increasing government expenditures – can result in more inflation. Policies
to ameliorate inflation – cutting expenditures or raising interest rates – can
produce less growth and raise unemployment. In effect when facing stagflation,
policy makers have to choose which quandary, inflation or lack of growth, is most
important to remedy first. That’s a choice no one wants to make.
Until this past week, the
Dems’ midterm election messaging did not directly address how worried and choleric
people have become about ever-rising, inflationary prices. Nancy Pelosi seemed
to agree, saying “We’ll have to message it better.” David Axelrod, President
Obama’s chief political advisor turned pundit, stated it’s a mistake that Dems’
campaigns did not explicitly mention how they would resolve inflation, the
nation’s primo economic problem. In his adroit words, this flawed messaging
strategy is “sort of like, ‘How was the play otherwise, Mrs. Lincoln?’”
Will this needed although belated
change in messaging overturn what pollsters now expect: a “red tide” on Nov. 8?
Remembering how flawed election polls can be, I’ll keep every finger crossed
that they’re wrong once again.
