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The Mystery of Economic Growth - Can Monetary Policy Impact It?

For too long, nary a day passes that the news is not filled with stories of economic malaise somewhere on the globe.  Europe’s economy has been stuck in quicksand for years, and most of Latin America and Africa for longer.  The U.S. is also languishing, with the labor participation rate at its lowest level in more than 40 years, no real wage growth in decades, and mostly low-paying service jobs being created.  Japan has seen similar problems for many decades and even the mighty Chinese economy, which has accounted for a large portion of global economic growth for some time, is slowing meaningfully.  The hue and cry for global economic growth is rampant, especially as we approach a Presidential election, but as I hear politicians and economists talk I am left with more questions than answers. I wonder: What is economic growth and what would it look like?  Can it be manufactured somehow by government edict or is it naturally occurring and beyond the influence of human beings?  Candidates all say they have the answers, but if they did then why have those answers not been put into practice.  

In the U.S., great faith to rekindle our nation’s economy has been placed in the hands of our central bank – The Fed.  Yet, despite unprecedented easy money policies the Fed has not succeeded in stimulating our economy at all.  Yes, we have high asset values as a result of ultra low interest rate policy, but this has mostly exacerbated the gulf between the have’s and the have not’s.  Without real wage growth and the creation of high quality jobs the economy is stuck in a very slow gear.  In addition, the Fed has been consistently way off the mark in its predictions for economic growth, leading an attentive observer to question whether they have the correct insights to even begin to evaluate our economic situation properly – let alone begin to come up with plans to remedy it.

I believe that before trying to stimulate economic growth one must be able to explain its absence.  When did the economy stall and why?  We rarely hear anyone speak of this, perhaps because they would have to admit they were wrong, and perhaps embarrassingly so.  In my mind, much of the blame can be placed upon some major incorrect assumptions involving the impacts of globalization and technology.  In the 1990’s both of those factors led to a broad euphoria as people in all walks of life, both the political right and left, hailed the coming economic period as being historically great.  The supposed benefits of global free trade and technological innovation were to lift the entire world to new levels of prosperity.  Twenty years later the opposite appears to have happened.  Could it be that free trade contributed to undermining domestic economies in developed countries by gutting the employment opportunities of the (former) middle class?  Is it possible that these former workers were not easily “re-trained” to make it in the new tech-driven world?  Do you suppose that encouraging more youth to obtain college degrees might have left them with no better earnings prospects but saddled with 6-figure debts that greatly dampen their ability to contribute to the economy?  Has technological innovation actually eliminated more jobs than it has created?

I think it is time to question many premises that are taken for granted by economists and politicians as “given.”  For example, there is a belief that stimulating spending is the Holy Grail for stimulating economic activity.  Following on that logic, government thinks that even in an economy wherein one’s job prospects, or at least one’s prospect for wage growth are low, it is desirable to stimulate that individual to spend more money by making credit more easily available and less costly.  I wonder if this makes any sense at all, or if it just borrows from the future, when this individual crashes and burns, and his debt is traded at pennies on the dollar, costing society greatly and allowing a few opportunists to benefit.  With that in mind, I find it suspicious that there is a call today from hedge fund and distressed debt fund managers for the Fed to raise rates.  Who, I wonder, would that benefit?  Yes, I do understand that low rates has led to seemingly silly asset values, however, with our government debt at a historical high and a very lackluster global economy, is today the day to precipitate a correction in asset pricing and thus reverse the wealth effect that was put into place by this very same policy 6 years ago to avert a depression?  Why, other than to provide trading profits and higher compensations for the aforementioned opportunists?  

I was against QE for the most part, and surely all but QE I.   I am on record in a piece published in the WSJ in November, 2007 suggesting that the Fed tighten and not fall prey to the temptation to ease, lest they set us up to follow the Japanese path.  Yet, today, nearly one decade later, our circumstances are different and call for a different approach.  The world is hooked on the drug of easy money, and going cold turkey at this point is implausible.  We must be weaned off of the drug, and it will take time, patience, vision, and leadership.  Growth will not be revived quickly.  The seeds for today’s problems were planted long ago and new seeds will need to be planted today for harvests to appear 10 and 20 years from now.  Our K-12 public education system is a disaster, and repairing it is essential to creating real growth.  Our citizens’ health levels are catastrophic, and the habits that have led to this must be reversed in order to reduce the tax that poor health places upon an economy.  These sorts of things won’t lead to quick results.  

Sadly our society has an all too short attention span and political and economic leaders are expected to solve problems in very short terms lest they be fired.  As a result, little long term planning is done, and ideas with long-term payoffs are given short shrift.  Instead, we continue to lean on the Fed and monetary policy to magically lift us.  Japan has had near-zero interest rates for about 30 years and that hasn’t worked.  It won’t work here either.  But jacking rates higher today isn’t the answer either.  It’s time for a mature leader to explain the realities and to guide us towards making the sacrifices that will lead us back to prosperity.

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