Today's core CPI of 0.4% was twice what economists predicted, and did not follow in lockstep with yesterday's low core PPI. That means inflation may indeed be lifting its head and growling, as the Fed believes. Bummer. I was hoping for a low number. Nonetheless, the markets are running slightly higher today on news of killer earnings from, well, every single company that I heard about on CNBC this morning. Even airlines are doing better than expected. Airlines that don't have Southwest printed on their tail. How?
There is an excellent exchange in today's Journal between two economists about the state of the economy and where it's headed. Although differing in their views of the size of government's role in the economy, the two agree on many fronts.
They both argue that things seem to be "between booms", as we were in the 70s. The 60s had pushed people to the suburbs, causing an explosion in consumer goods. The 70s, well, were not so good. In the 80s, the tech boom began - first with personal computers and ending in the bursting of the internet bubble in the early part of this century.
So what's next? What new technology or consumer trend is going to bring us out of this "soft patch" and drive growth for the next X-many years? Read the article, and let us know what you think.
2 comments:
Hey man,
Can you post the content of the article for us "non-subscribers?"
--James
Sorry - I forget about that:
Economist Bloggers Make
Prescriptions for Growth
April 20, 2005
Economic news has been confusing of late. Fed officials are signaling more concern about inflation, the stock market has been struggling and consumer confidence is down. But interest rates remain at historic lows and the housing market is barreling ahead, while volatile oil prices are weighing on both corporations and vacationers alike.
So, how healthy is the U.S. economy, really? Are we on the edge of a recession or a boom? Economist bloggers John Irons and Arnold Kling agreed to take the economy's pulse, diagnose what (if anything) is ailing it, and write the necessary prescriptions.
Share your thoughts on the matter at our discussion board, here.
* * *
[John Irons]
John Irons writes: Like many economists, I have been looking forward to a period of strong and broad-based economic growth. It has been about three and a half years since the official end of the recession, and it seems like an economic boom is just around the corner. But, then again, it felt that way last year. And the year before.
And while I like to be optimistic, the economy faces a number of short-term risks, as well as significant long-term threats.
In the short term, recent news hasn't been good. While it can be dangerous to extrapolate from just a few, high-frequency data points, the last couple of weeks haven't been particularity encouraging. Consumer confidence has fallen, oil and gas prices are on the rise, and the number of new jobs has been mediocre. IBM has missed expectations, and retail sales have been weak. The stock market has felt this downdraft, with the Dow (still!) hovering just above 10000.
MEET THE PARTICIPANTS
John S. Irons is director for tax and budget policy at the Center for American Progress, where he specializes in federal tax policy and budget issues, as well as broader macroeconomic policy. He previously worked at OMB Watch, a nonprofit organization dedicated to promoting government accountability and citizen participation, and Amherst College. He blogs regularly at www.argmax.com/mt_blog/, which was listed No. 2 Economy Blog by Forbes.com in 2003. Irons holds a B.A. in economics from Swarthmore College and a doctorate in economics from the Massachusetts Institute of Technology.
Arnold Kling has been posting online essays on economic topics since 1997. He has worked for the Federal Reserve Board and the Federal Home Loan Mortgage Corporation. He founded Homefair.com, one of the first commercial Web sites, which was bought out in 1999 at the height of the Internet bubble. Since 2000, he has taught high school economics and statistics as a volunteer. His personal Web site is http://arnoldkling.com. His economics blog, EconLog, is at http://econlog.econlib.org. He writes frequently for TechCentralStation.com, and he has published two books: "Learning Economics" and "Under the Radar: Starting Your Internet Business Without Venture Capital." He has a doctorate in economics from the Massachusetts Institute of Technology.
Consumer confidence fell last month, perhaps as a result of gas prices that have risen significantly since this time last year. Alan Greenspan recently said that "markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation."
Nearly three and a half years after the end of the recession the labor market is still weak. The economy added just 110,000 new jobs last month, the average length of unemployment spells remains at high levels at 19.5 weeks, and the employment ratio, at 62%, is still well below where it should be. More than one in five of the unemployed have been looking for a job for more than six months, and many have simply given up looking. Wage growth has failed to keep pace with inflation
And inflation, while still low, is becoming an emerging threat. With oil prices skyrocketing and the dollar haven fallen substantially (thus making imports more expensive) inflation fears are rightfully emerging. While oil is a smaller percent of the economy now than it was during the stagflation years of the 1970s, it would be foolish to rule out any negative impact of oil in the $50 a barrel range.
Furthermore, recent (and probable future) interest-rate increases (which could be triggered by inflation fears) also add to the short-term worries. If the rate hikes slow the hot housing market -- one of the few strengths over the last several years -- the economy could be in real trouble. This is especially true given the large and growing levels of credit-card debt being carried by most Americans.
In my next post, I'll dive into some of the longer-term risks.
* * *
[Arnold Kling]
Arnold Kling writes: Thanks for starting things off, John.
Twenty-five years ago, I had just gotten my Ph.D. and accepted an offer to work at the Fed. At that time, I thought I knew a lot about macro. Not so any more.
Part of it is that the economy is changed. Over the past quarter century, it seems to have become more elastic, harder to steer, and more bubble-prone. In my book, the section on macro is called "macroeconomics and bubbles."
But even if we had the same economy that we had in 1980, I'm not sure that I would believe as I did back then. At least I would have more doubts.
So for today's issue, I would like to put my thoughts in terms of what I do not understand.
• I do not understand why foreign investors have such a large share of their portfolios in U.S. Treasury securities. What I wrote two years ago still goes. Compared with what I would have expected, the dollar has been stronger, our trade deficit has been larger, and interest rates have been lower.
• I do not understand how the transportation industry has been able to withstand high oil prices. Take airlines, for example. Other than Southwest, I do not understand how any airline keeps flying. They are not the most profitable businesses even in the best of times, and with fuel costs today ... What are their creditors thinking? If they keep trying to hang on, how can the airline paper that they are holding be worth more than a paper airplane?
• I do not understand why houses in my neighborhood sell so quickly for such high prices (over $600,000, compared with less than $400,000 two years ago). Where do people get the money to afford the payments? A year ago, I was not persuaded that we were in a housing bubble. Now I am.
John, you mentioned some of these things, also. But I am not sure if they play into your thinking on long-term risk.
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[John Irons]
John writes: I think all of your risks are well founded. Having recently purchased a house, I can attest to the fact that housing prices seem to be a bit crazy! On the other hand, with interest rates still low -- it can still be a good investment.
Overall, in the long-term there are three main threats to the health of the economy: federal budget deficits, massive trade deficits, and a lack of savings and investments.
Former Fed chairman Paul Volcker recently cited the deficit as a major risk factor, saying that the economy is "…skating on increasingly thin ice." Despite claims that the deficit will be "cut in half" in five years, I don't think anyone believes this will happen with the current fiscal policy in place. We are borrowing from our future and increasingly from foreign lenders. On the international side, the trade is at record levels and also threatens the long-run stability of the economy.
Finally, a colleague of mine recently passed along a special report on science funding from the April edition of Physics Today. The article describes the myriad funding cuts throughout the federal government, and quotes the American Association for the Advancement of Science as saying that the president's budget proposes "growth in the federal R&D portfolio [that] would fail to keep pace with inflation for the first time in a decade, and most R&D programs would suffer cuts in real terms." Personal savings rates are under 2% and national savings, and we are running well over $400 billion in federal deficits -- and thus we are straining the amount of money available for private and public investments.
This is what I see as one of the biggest risks to the economy. Poor fiscal policy leading to low national savings rates and underfunding of investments in basic science (and other budgetary priorities) will inevitably lead to a weaker economy in the future.
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[Arnold Kling]
Arnold writes: My sense is that the economy is between booms. In the 1920s, we had the automotive boom. In the 1950s and 1960s, we had the post-war boom, with people flocking to suburbs and stocking up on consumer durables. In the 1970s, we were between booms, and then in the mid-1980s the personal computer boom got rolling, followed by the Internet boom.
What you want to see in a boom is new investment, new business formation, new goods and services. Our teacher Bernie Saffran used to say that an economy needs to have a leading sector. Housing is not a good leading sector--it's more of a fallback when nothing else is going well. I think that the leading sector for the next boom might be nanotechnology, but it could be several years away, or it might turn out to be less explosive than I'm hoping for.
I don't fancy the fiscal deficit, either, but if it were doing a lot of damage to the economy, I think we would be seeing higher interest rates. Adjusted for inflation, rates still strike me as very low, which is consistent with what Ben Bernanke called a world-wide savings glut.
If there is a savings glut, I'd like to see more of the funds flow into investment. I think that for the last year and a half, Sarbanes-Oxley has had a major dampening effect. In any year, a large corporation can pursue no more than two or three key initiatives. Senior management doesn't have time to pay attention to more than that and still run the baseline business. And without senior management focus, people lower down cannot get cooperation across departments or division, which you usually need to execute a new initiative. For a lot of companies, Sarbanes-Oxley compliance has been one of the top three priorities for the past year or two, which means that at most one or two other major projects have been on the plate.
That's not to say that I think it would help now to repeal Sarbanes-Oxley. The damage has been done, and I think most companies have now fit it into their baseline operations and moved on. But it was a huge mistake.
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[John Irons]
John writes: I like the idea that we are between booms -- certainly different periods of expansion have different characteristics (although there are many similarities as well). I think the current expansion is showing that mediocre growth is not enough. Real improvements in poverty, the labor market and unemployment, in median incomes, etc., require an economy like what we saw in the late 1990s and haven't seen since.
When thinking about investment projects, I tend to segment investment into several bins. First there is the standard kind of business investment in things like factories and equipment -- the purpose of which is to increase productive capacity down the road. The second is investment in R&D, which is done by business often together with the public sector, which is more about developing new products (and not necessarily more products). The third kind is investments in basic science and technology, which is done largely in university and government labs and is strongly supported by tax dollars. These investments are a catalyst for driving investments of the first two types. Industry isn't as good at this last function since the profits may not come immediately.
I concur with you in that I think that there has been somewhat of a lull in economy-leading investments of the second type above -- iPods are new, but there have been little other highly visible transformative technology changes in recent years. And selling a bunch of iPods is not enough to really drive the economy. (I also worry that the public investments in the basics is way too low.)
Perhaps the economy is waiting to dump investment dollars in the "next big thing" -- if you have any insights, be sure to let me know!
* * *
[Arnold Kling]
Arnold writes: Perhaps the Next Big Thing is not another general-purpose technology invented in the U.S. The Next Big Thing could be developing-country expansion. I say that not so much because I can picture it occurring but because it would be a neat resolution to a number of vexing issues. As Bernanke put it (a recent restatement of his thesis is here), the U.S. trade merchandise trade picture would improve if "developing countries [were] to re-enter international capital markets in their more natural role as borrowers, rather than as lenders."
Imagine that barriers to entrepreneurship and foreign investment in Asia, Africa, and Latin America suddenly went away. Regulations were eased, processes for licensing and incorporation were streamlined, bribery of and extortion by government officials eliminated, etc. In that case, world savings would be diverted toward financing an investment boom. Some of the equipment and services used by new and expanding foreign businesses would be imported from the U.S. Our trade deficit would decline, and the employment picture might finally show some meaningful improvement.
Another possibility that would help would be a collapse of oil prices. However, I consider that an unlikely event, also.
Finally, and perhaps least likely of all, our major trading partners could see their economies take off. If Canada, Europe, and Japan were to undergo expansions, then the foreign trade sector could play a leadership role in our own economy.
But the big risk out there is that none of the optimistic scenarios will play out. Instead, foreign trade will not give us any oomph, and the Next Big Thing could turn out to be several years away. In that case, we'll remain between booms for another several years, just as we did in the 1930s and 1970s. I think we have a better idea now of the need to avoid excessive monetary contraction or expansion, but otherwise there may not be much that can be done about mediocre economic performance. Certainly, the standard Keynesian prescription of another upward ratchet of the budget deficit seems unappetizing.
* * *
[John Irons]
John writes: An uptick in foreign economies -- either in developing or developed countries -- would certainly be nice; however, I'd rather not rely on foreign sources of growth for our domestic success.
Also, there is the conundrum that a surge in world economic growth would put yet more pressure on oil prices. This is not a good reason by itself to worry about growth, but it makes having a real energy policy even more important. But, right now, high oil prices and slow growth are much more on the minds of the world's leaders.
I also worry about the fact that the massive federal deficit has tied our hands somewhat when it comes to addressing macroeconomic performance. If the economy were to slide from its current levels into recession, it would certainly be nice if we had some leeway to use fiscal policy. The falling dollar places the Fed in the awkward position of wanting to keep rates from dipping, and so we would be left with no real way to stabilize the macro economy. This is one of the real risks of the deficit -- that we won't be able to use spending or tax policy to soften an economic downturn.
I am very much an optimist, so I think the vibrancy of the American economy will eventually pull us out of the doldrums, but I fear continuing reckless policy from here in D.C. (Real PayGo rules and changes in tax policy would be a start!)
* * *
[Arnold Kling]
Arnold writes: So, in summary:
1. Using the labor market as an indicator, overall economic performance in the U.S. is subpar. Apparently, Labor Force Capacity Utilization is still below what it was in November 2001, when the recession supposedly ended. Earlier, I used the expression "between booms," which might be considered a polite way of describing an economy that has remained close to recession since early in 2000.
2. Given this subpar performance, the headwind of high oil prices is most unwelcome.
3. Government spending priorities and deficit projections are not what one would like to see in terms of promoting long-term growth and restraining the burden on future generations. The Bush administration's fiscal policy appears to owe more to following a path of least political resistance than to any coherent economic strategy.
4. The foreign sector is out of balance, but that owes something to peculiarly high net savings abroad. It probably would be better if other countries found more productive uses of savings than funding the U.S. housing boom or our budget deficit, but that is something largely beyond our control.
5. The best economic performance comes from investment in productive new technologies. We can be optimistic that our labs and entrepreneurs will eventually provide us with an exciting new field of innovation, but right now there is nothing that is obviously poised to play the role of a leading sector.
6. If there is a Keynesian fiscal stimulus card in the deck, then we have already played it. Neither John nor I want to see another round of spending increases or tax cuts, even if the economy worsens.
7. It is unreasonable to hope that monetary policy can "fine tune" this economy, particularly given oil prices and the possibility of a housing bubble.
You and I differ in many ways in our policy preferences, particularly when it comes to the size of government. But our assessments of the macroeconomic situation are difficult to tell apart.
* * *
[John Irons]
John writes: It looks like we agree on a number of areas. As you say, I think we may likely disagree on policy recommendations, but knowing what problems we face is a good start.
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