Stimulus, Growth and Recovery: The Debate Continues

There is growing intelligent dissent to the administration’s stimulus policy.  Critics argue that recent growth is the result of market principles.  Edward P. Lazear wrote Monday in the WSJ, that he forecasted a return to growth without stimulus spending.  He goes on to argue, along with others, that  housing programs have had questionable results.  Lazear said that Uncle Sam is fibbing about job growth as well, reporting job retention as if it where job creation.  John Irons of the Economic Policy Institute agrees.  The administration has an incentive to report positive unemployment numbers- the most popular, but also misunderstood indicator.

Unemployment is only part of the overall picture.  Other improving indicators reported this week tell us that the economy is turning around-but for whom? It depends on how you define growth.  A technical definition says that growth is positive GDP.  That means little to most people.  Real growth, theoretically, is an improvement in living standards for the entire country.  That’s why Main Street understands the unemployment rate.  Accordingly, the media use it as the sole judge for growth.  The problem is, as Lazear mentioned,  job growth is the final component of recovery- behind financial stability and GDP growth.  Unemployment lags years behind an actual recovery.   If unemployment is a lagging indicator, Lazear cannot empirically link failed stimulus policy to persistent unemployment.  He says that the administration is ignoring job losses while inflating job creation numbers.  Isn’t he doing the same thing by ignoring market stabilization and GDP growth? 

BEA Released GDP Data This Week 

According to the BEA, GDP is up for a number of reasons.  Look closely at the report.  Exports rose 14 percent over last quarter and consumer spending rose 3.4 percent.  Market Watch reported that positive numbers where in part due to stimulus spending, but as I argued in the past, these gains are only temporary.  The purpose of the stimulus is to stabilize the economy so that private markets can function again.  There is no wider conspiracy.  The government will roll back stimulus as soon as it sees the return of private investment.  There is evidence of this already: government spending actually slowed by 3.5 percent.

Not all the news was good.  Personal income fell and prices rose.  Hopefully this is a temporary trend based on slight price increases and high unemployment.  However, as long as export growth remains positive, I see no need to fear 70s style stagflation.  

Savings and Long-Term Growth

According to the old Solow Model, a country’s savings rate is positively related to long-term growth.  Today, personal savings is around five percent, that’s up from around one percent just four years ago.  This bodes well for long-term growth in the US.  And now is a great time to invest.  As private investment (including people’s savings) replaces public spending in the next few years, markets will rebound.  Private investment will power an upswing in the business cycle, spark growth and reduce unemployment. The sooner the government rolls back stimulus, the better.  In the mean time, citizens can take advantage of great opportunities in real estate and other deflated markets.  This transfer of savings from a stock to a flow will jump-start the economy in way no stimulus could.  It would take tens of trillions of dollars in government spending to match the power of private investors.

Thomas J. Powell

Dollar Distress

This bogus Robert Fisk story is getting a lot of play today.  He claims that the Saudis, Russians and Chinese are holding “secret” meetings to price oil in something other than the dollar.   If they exist, the meetings represent a shift away from a US dominated world economy.  This has been the case since at least 1989, but the idea never fails to stir conspiracy theory. 

Quacks harbor a particular fear of China since it holds over $2 trillion in US debt.  China has long threatened to assert its growing economic muscle by abandoning the dollar altogether.  A few years ago, China switched from a currency pegged to the dollar, to one that floated against a basket of currencies.   A recent China Daily article reflects many misconceptions.  For one, they claim that the fate of the dollar is intrinsically tied to comments made by Chinese officials.  Second, it reiterates China’s call for a new reserve currency.  These policy changes and statements are just political. They only fuel conspirators misunderstanding of international monetary policy.

The truth is, as Epstein points out, China’s fate is tied to our economic policy-not the other way around.   Last year, despite financial crisis, China increased its holdings of US debt. It takes a lot more than a few meetings, secret or not, to create a new reserve system. 

Doomsday types proclaim the end of US hegemony and the fall of the empire through a weak dollar.  Again, bogus.   A weak dollar can be good for an economy.  It boosts exports, decreases costs for debtors and gives investors holding foreign investments higher yields. Most big US companies have international holdings, so they are immune to small fluctuations.  A slight devaluation can stimulate an economy. Also, this is the US, so a depreciating currency will not cause capital flight as it did in Thailand ten years ago.

One more thing about the quacks: how would a single global currency eliminate current account imbalances, inflation, risk and instability?  It makes no sense.  We still have all of these things within monetary unions. If you look at Poland or the UK, you can find both benefits and costs to joining a large monetary union.  In order for any monetary union to work, it musk have flexible financial and labor markets with a shared governing body.  An integrated global union would concentrate power even further, not democratize the global economy. 

As for the Fisk story, it doesn’t matter what we price oil in.  The Saudi’s are not actually carrying around bags dollars- oil transactions are electronic and denominated in whatever currency you like-dollars, euros or Cuban cigars.