Saturday, March 12, 2016
It’s the “Stupid” in “It’s the Economy Stupid”
Economics is a very complex interaction of monetary (interest rates, currency valuation, bank rules and money supply, where the Federal Reserve holds sway) and fiscal (government spending, taxation and incentives, where Congress creates the mess) policies interlaced with global conflicts, trade treaties and restrictions, weather anomalies and the perceptions/expectations/ attitudes of peoples all over the world. Yet too many political leaders are looking to simplistic and explainable paths to convince their constituents that everything will be fine. It is precisely this reliance on simplistic solutions that has caused global markets to destabilize, even collapse, accelerating the extreme polarization in income inequality that foments anger and conflict.
Since June 1st, the key stock indexes for the United States have fallen 6%, China 40%, Europe 16% and emerging markets 21%. Oil has been in freefall, quivering up very slightly of late, from over $100/barrel a year ago to somewhere between $30 to $42, depending on the day of the week. Commodities in general have plunged 21% since that June date. Across the board, we are seeing governments at every level dragging out policies based on past strategies that have simply failed. They may sound good, but they just do not work.
In utter desperation, on March 10th, the European Central Bank announced that they “would effectively pay commercial banks money to borrow central bank funds… The offer, one of a half-dozen measures the central bank announced on [March 10th], means banks that participate would pay back less at the end of the four-year loan than they borrowed. It’s the same as if your bank offered you a no-interest loan, plus a free toaster as a bonus.
“Banks will qualify for the money only if they lend it on to consumers and businesses. And there are other conditions. The money cannot be used for mortgages, for example… The step represented a significant escalation of the E.C.B.’s efforts to get banks to lend more money, apply a jolt to the eurozone economy and head off the threat of a destructive decline in prices known as deflation.” New York Times, March 10th. Other governments apply other measures, some of very questionable value… but it sounds good to naïve voters expecting miracles.
All over the world, we are watching as political leaders cry for and implement so-called “supply side” economics – reducing the regulatory/tax burden on the wealthy in the hopes that they will use their newfound cash to invest in job-creating growth. There’s just one catch: the wealthy didn’t get that way by investing in new jobs with newfound tax savings unless there is/was a measurable demand for the relevant new products and services in the marketplace. And since global consumer demand has pretty much tracked the above markets, the wealthy have simply hung on to these savings, and the kinds of jobs that have been created are low-paying with little or no chance for growth or advancement. The “gig” economy has created workers at the margins of our labor force.
What’s worse, these tax breaks to the rich have reduced governmental revenues and limited their ability to invest in true job-creating, economic growth and efficiency-generating structures: education, research & development and infrastructure. The famous “Grover Norquist pledge” not to raise any taxes, signed by most Republicans, has been one of the most destructive policies imaginable. Ronald Reagan understood the need to use tax rates as a meaningful governmental tool, a prospect which most Republicans now reject. As recent examples, Kansas and Louisiana implemented significant tax cuts based on this premise, only to find huge new state budget deficits without the predicted economic growth needed just to sustain even their moderate levels of governmental operations.
Writing an Op-Ed piece for the March 10th New York Times, Wall Street financial maven, Steven Rattner, explains more about these issues: “Lacking confidence and seeing weak demand, many businesses have held back on investing, and in the challenged energy sector, cuts are rampant. Meanwhile, the rise of capital-efficient businesses — from Amazon to Uber — means less spending on machinery and buildings.
“Well-intentioned efforts to avoid another financial crisis have put the banking system in a straitjacket, discouraging lending and reducing liquidity on trading desks, which has contributed mightily to market gyrations.
“In turn, weakening credit markets stir fears of corporate bankruptcies. While falling prices of oil and other commodities help industrialized countries, they signal not just rising supply but also disappointing demand.
“All that said, governments haven’t done enough to help the situation — and have done a lot to exacerbate it. Closest to home, of course, is gridlock in Washington. Anti-deficit fervor has led to a meat-ax approach to spending cuts, under which nondefense discretionary outlays (which include key pro-growth areas like research and development and infrastructure) have fallen in real terms by nearly 20 percent over the past five years, at a time when they should be growing substantially.
“Meanwhile, Congress has not passed a comprehensive tax reform package in three decades, which has given clever experts room to develop loophole after loophole, particularly for multinational companies eager to cut their tax bills by sequestering profits overseas.
“Fueling still more fear among consumers and businessmen alike is the looming presidential election and the surprising strength of contenders like Donald J. Trump and Bernie Sanders, who promise unconventional, and potentially disruptive, changes if elected.”
With its colossal migrant crisis, the mix of a strata of varying levels of economic reality, country-by-country, Europe is experiencing problems that are much worse. Looking at the above market-by-market comparison, the United States is the nation with the “best loss rate,” a loser nonetheless but less of a loser than everyone else. Make no mistake, this does not make us a “winner” or suggest that our policies are the ones that should be followed by everyone else.
Cries for austerity have sucked money out of the economy just as falling consumer confidence has only amplified that reality. The huge productivity gains of the last decade seem to have hit a technology plateau as well. “[G]lobal competition and weak productivity growth have held down wages in developed countries. That has depressed consumer spending, as have increased saving and growing income inequality, which has pushed more money into the hands of the rich, who are less likely to spend it.” Rattner.
The International Monetary Fund keeps revising global projected growth rates downwards, year-after-year. Yet the steps most governments are taking to deal with the current political climate and the emerging recession reflected in the above numbers are only making matter much, much worse.
Unable to explain complex economics to the average citizen (noting that economic policies always need to be fine-tuned as change occurs), often even themselves lacking in the necessary education to appreciate the variables, political leaders are increasingly relying on politically expedient slogans and policies that will get them elected and, when these policies inevitably fail, to be able to blame someone else. They want to link the core of their party’s platform to such policies, even if history has repeatedly shown that such patterns just plain do not deliver. It is indeed possible that the amalgamation of such errors introduced into our economy, particularly over sustained periods of time, become so disruptive, generating anger, extreme polarization and conflict, so as to bring down the entire socio-economic and political system, potential that history has witnessed repeatedly. Yes, it actually could happen here!
I’m Peter Dekom, and as complex as these issues are and as easy as it is to take good-sounding simplistic slogans could actually lead to a very serious deterioration in their economic well-being.