GROWING, GROWING GONE?

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.  

Economic Growth 

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.

 

 

 

 

OUR DISCRETIONARY RECESSION

The fish rots from the head ~ Turkish proverb      

Let’s pause for a moment, take a deep breath, and somehow not focus on November 3. Next Tuesday has understandably become an all-consuming emphasis for obvious reasons. It may be impossible, but it’s worthwhile thinking about the abysmal economic reality we’ve been living through since shortly after 2020 began. This recession will continue to plague our nation well after next week because the Republicans have chosen to extend it.

The US has been in a harsh economic recession at least since early April, when our unemployment rate skyrocketed to 14.7%. The official arbitrator of business cycles, the Business Cycle Dating Committee (no, it’s not part of Tinder) of the National Bureau of Economic Research (NBER), announced in June that the recession began during this year’s second quarter (April – June).

In September, the (latest) unemployment rate was 7.9% - that’s 12.58 million people, people who want a job and can’t find one. This elevated unemployment rate is the largest in 8 years, not counting the historically-higher unemployment spike between April and August. Our real (inflation-adjusted) GDP dropped 5.0% in the first quarter and a massive 31.4% in the second quarter at annualized rates. This second-quarter reduction is the largest ever. As every conscious, competent person knows, these have not been good times, despite what #45 falsely asserts.

The NBER’s proclamation noted the distinctiveness of this recession. “The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions.” One big distinction is this recession first affected the services sector, the most prominent contributor to our national output (GDP). The services sector accounts for over 68% of our GDP and more than 80% of our national employment. Another distinction was the speed that the previous good times suddenly stopped rolling along. These distinctions are solely due to the unique cause of this recession: covid-19.

Many previous recessions have initially battered “traditional” sectors such as manufacturing and more generally, the goods-producing portions of the economy. This recession hasn’t hit as hard the manufacturing sector, which is near and dear to every politician, but now accounts for just 7.3% of national employment. That’s less than one-half as many people who are employed by state and local governments.

Econ 101 textbooks’ discussions about how governments can escape the ravages of recessions focus on implementing expansionary monetary and fiscal policies. Monetary policy is set by the Federal Reserve Bank’s (the Fed’s) Board of Governors. Fiscal policy is multi-layered, referring to discretionary funds authorized and spent by federal, state and local governments.

Most of the Fed’s monetary policy mechanisms focus on changing the money supply and interest rates for buying or selling government bonds. During recessions the Fed increases the money supply and decreases interest rates. As such, monetary policy’s principal channel for influencing the macroeconomy is narrower than that of fiscal policy. Fiscal policy expenditures can and have been much broader in scope.

Monetary policy most directly influences business investment and consumer and business loans. Lowering interest rates during recessionary periods often lead to more investment and more lending because it is cheaper to buy loans. Beginning in July 2019 and sensing up-coming weakness in the economy, the Fed has dramatically lowered interest rates, via its Federal Funds Rate, FFR. Now the effective FFR is a bargain-basement 0.09%. More remarkably, the 10-Year Treasury Inflation-Protected Securities’ (TIPS) interest rate is -0.91%. During the past year, the Fed has increased the M1 money supply 41%, to $5.5 trillion.  

The seven-member Fed Board of Governors meets about once every six weeks to decide whether or not to change monetary policy. Last February, the Fed held three emergency meetings to respond to the coronavirus crisis. They significantly lowered the FFR. Despite these efforts, gross private domestic investment has steadily declined 21% during the last 18 months.

Because federal fiscal policy requires legislative action by 535 Congresspeople (435 members of the House and 100 of the Senate), it rarely coincides with the economy’s current needs. It often lags changes in the business cycle. That’s once again true now.

Congress authorized the unprecedentedly-large and effective $2.3 trillion CARES Act stimulus seven months ago. The CARES Act increased individual unemployment benefits, provided $1,200 checks to over 150 million people, offered more than 600,000 small businesses forgivable loans to pay their workers via the Paycheck Protection Program, as well as aided large companies and state and local governments.

Federal fiscal policy has been invisible since last Spring. Despite the ever-growing need, national expansionary fiscal policy has been stopped dead by Congressional intra-mural hostility, chiefly due to Senate Repubs’ intransigence, and the Administration’s incompetent team of sycophants.

The key proponent for this disinterest in needed Congressional expansionary fiscal action is Mitch McConnell, the Senate Majority Leader. On October 20 he warned the White House not to initiate a new stimulus agreement with House Speaker Nancy Pelosi before the November 3 election. He and his Repub colleagues are consciously choosing to postpone any expansionary fiscal policy that would begin remedying this recession.

I characterize Mitch’s strategy as a discretionary recession extension. It is completely perverse from both economic and political perspectives. Sen. McConnell’s strategy also directly conflicts with #45’s latest hopes to “go big” with a second stimulus before the election.

The idea of Republican Congresspeople purposefully deciding to prolong a recession and not alleviate its sizeable, adverse effects has no precedent. One commentator mentioned that Mitch and his Repub neo-austerity caucus are not only practicing bad economics but also really dumb politics.

How would Mitch explain his refusal to help fellow Kentuckians (along with every other US resident) as soon as possible? It’s a mystery. Especially because his constituents will be voting against or for him on November 3. They have been suffering from a giant 77% increase in Kentucky’s unemployment since last year. For the intransigent Repubs, folks’ suffering makes no difference.

After Joe wins on November 3[1], the Senate and House Repubs, as well as #45 will completely dismiss any more fiscal policy support on the public’s behalf. Why? Because in their minds such support will make President Biden’s life somewhat easier. The outer, pro-deficit coat they have grown with #45 will be promptly shed as they metamorphosize back into their usual hard-shelled Republicanas hypocritus, representationally shown below.

     Republicanas hypocritus

Repubs will once again shout their disingenuous abhorrence of larger public debt, even though every Repub Senator voted in 2017 for #45s massive, debt-laden tax breaks for the already-rich. The 2020 federal fiscal deficit is $3.1 trillion, amounting for 15.2% of GDP, more than triple the deficit for last year and the largest deficit as a share of the economy since 1945.

With the expectation of Joe Biden occupying the White House, Mitch and his Senate Repubs have already begun to sermonize about their newly- uncovered distaste for discretionary fiscal policy, just as they did with President Obama. They conveniently disremembered this stridency from January 20, 2017 until now.

I recommend Speaker Pelosi promptly reconsider and act on the latest White House stimulus offer of $1.8 trillion (versus the Dems’ $2.2 trillion). Sure, it’s only 81% of what she wants and the nation needs, but Mitch’s Senate will wholly disregard it. Their utter disdain will again amply reveal the Repubs' neglect of voters’ wellbeing. The Repubs’ deep interest in extending their discretionary recession will help ensure the Dems’ recapture of the Senate in addition to the White House.

 

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[1] I’m perhaps naïvely assuming Joe’s popular vote victory will be honored in all states’ legislatures and the proscribed Joint Session of Congress, presided by the Vice President, on January 6, 2021. That’s the date Congress members will formally accept the Electoral College votes and certify the election. However, before January 6 when the States are assembling their electors’ votes, Repubs might exercise their virulent hopes by having a state, whose voters gave Joe Biden their nod, and with a Dem governor but a majority Repub legislature (prime examples are Pennsylvania, Wisconsin as well as 6 other states) could refuse to accept the governor’s certified results of their own voters and dismiss the Dem electors in the state’s Electoral College. Such a dismissal would force these electors to become Electoral College drop-outs. The Repub legislators then could substitute their own slate of Repub electors, despite the popular vote results. It’s yet another reason to wish that no person drops out of college, any college. Of course, it’s never happened before; but.

  

TIME AND AGAIN…

Time flies like an arrow. Fruit flies like a banana. ~ Groucho Marx

Recently, physicists reported that they may have found sub-atomic particles (neutrinos) that travel faster than the speed of light; an occurrence that if verified would be inconsistent with Einstein's theory of relativity. That could cause a fair amount of soul-searching in the physicist realm. Meanwhile, in the non-scientific world of Washington D.C. policy-making, time seems to have stopped altogether. Our elected federal representatives get stopped any time they deal with anything related to creating economic/fiscal policy. They continue talking past each other and consciously avoid creating appropriate, effective fiscal policies for our time – a time of continued macroeconomic weakness, elevated long-term unemployment (6.2M Americans have been out of work for half a year or more) and increased inequality.

How can time be so different? I have become so inured to the incomprehensible, outrageous positions politicians (mostly Republicans) have taken regarding the US economy – oh, say regarding the deficit and fiscal policy in a time of sustained unemployment – that I've started doing 2 things. First, I've stopped listening to the media's reports on "the latest" goings-on about Congress', the president's and/or the "super-committee's" macro-economic policy deliberations. It's pointless since they are merely stonewalling any movement to a rational policy due to base politics. They'd rather wait until the very last moment and pass another sub-optimal measure that at best addresses a few of the effects not the causes of our economic malaise, or produce another temporary, partial "budget," so they can pretend to be doing something useful. Nothing substantive is happening that will relieve real citizens' economic unease. And fewer people outside the Washington beltway are fooled by the politicians' empty talk. Which explains in large part why only 15% of surveyed citizens approved of the job Congress is doing; I'm surprised it's that high.

Second, I'm again wondering how seemingly bright people – the folks we've elected to manage our nation and lead its future development – can believe in such outlandish, downright short-sighted, stupid behavior. Despite no evidence of competence for resolving our on-going economic problems, there appears to be absolutely no political soul-searching on the part of Republicans or Democrats that would create more reasoned and responsible approach to getting our nation moving and growing again. Instead, it's always one more time, without any feeling, to do nothing useful except play with each other and blame someone else.

Once again, the narrowness and myopia of political discussion astounds me. What time (and place) do they think they are in? Politicians only care about their (and their funders') current, narrow self-interests. The only time they seem concerned about is today, not tomorrow or afterwards.

Economists have several tools for evaluating this inept behavior, including present value. Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate. The higher the discount rate, the lower the present value of the future cash flows. In not acting as if tomorrow (the future) has any value, politicians essentially have a nearly infinite discount rate – not valuing the future at all – where future consequences are completely dismissed. Most non-politicians (e.g., normal adults and businesses) do place value on the future, act accordingly, and expect other folks to do so as well. Actual people's implied discount rates are often subject to debate, but probably range from 3% to 8% at this time. Thus, there is a monumental difference between the politicians' discount rate and that of the rest of us.

For me this difference in time-perspective explains a fair amount of the impending tragedy of politicians' neglectful, juvenile behavior. If they don't value the future (other than getting re-elected), have no time for serving the broader public's interests to get the economy growing again, and choose only to recite dogmatic, selfish ideology, why would they do anything except be histrionic? They're stuck in time, unable to agree to any compromise that could lead us forward and improve ourselves, because they don't care at all about the future. And who suffers most from this? We do.

Should we be surprised that our politicians have difficulty making politically-unpopular decisions in a timely manner – like reducing entitlements and reducing defense spending? Not at all, they are difficult decisions that if properly done, will initially upset many. But these decisions must be made ASAP; and aren't being made by politicians whose job it is to make them. I didn't vote for "my" politicians to merely continue the unsustainable status quo of no growth, high unemployment and growing inequality, I voted for them to look forward, solve these current problems and hopefully make things better. At this time, no politician now seems interested in doing his/her real job.

This time is not that different from others in the past – we remain in a significant recession and need to get the country growing by augmenting government spending to put more people back to work. In time and after we start growing again, unemployment will fall as businesses and consumers start to invest and consume more. [The most recent quarterly increase in real GDP was a miserable 1.3%.] What we now don't need at all is reduced government expenditures that would further prolong the recession. The Republicans' unyielding fetish in "making government smaller" and "no new taxes" at this time is wrong, fool-hardy and self-defeating. It's yet another example of politicians being "stuck in time" (by not having any interest in considering the future), thereby making our impending prospects needlessly more difficult and dour. This leads to increasingly resonant feelings that this time throwing all of them out on some sidewalk may be useful. Or maybe we should just feed them some special neutrinos to get them moving. If only.