An updated view of the economy (part one)

Four years after the end of the “Great Recession,” SAFE surveyed five aspects of the US economy: growth, jobs, inflation, government services and taxes. A Survey of the US Economy, SAFE, August 2013.

The economic situation seemed bleak at the time, and SAFE had plenty of company in predicting that things wouldn’t improve without significant policy changes. Two alternative scenarios were envisioned for the next crisis.

Is this country in for a big crisis now (economy starts to perk up - inflationary surge - Federal Reserve tightens monetary policies and interest rates soar, aborting the recovery), or an even bigger crisis later (economic stagnation – unsustainable deficits – roof caves in when lenders lose faith in government’s ability to meet its financial obligations)?

We subsequently outlined some ideas to improve results in each of the designated areas. Our suggestions were intended to be illustrative rather than exhaustive, and it was envisioned that they could all be implemented (or at least started) within a year or so. Less is more: a 10-step plan to reboot the economy,

It would be pleasant to report that SAFE’s 10-step plan was put into effect, with salutary results, but that’s not how things went. Only this year, with a new administration, has action begun on some of our suggestions. Meanwhile, several features of the economic landscape have shifted and some new issues are coming to the fore. Time for another look and perhaps an updated action plan. Here goes.

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The economic growth rate (inflation-adjusted GDP) hit 2.7% in 2014 (its annual peak during the Obama administration) and then tailed off to 1.8% by 2016. US real GDP growth rate by year,, accessed 11/18/17.

GDP grew at a lackluster 1.2% annual rate in the first quarter of 2017, but averaged 3% for the second and third quarters. Gross Domestic Product: Third Quarter 2017 (advance estimate), Bureau of Economic Analysis,

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SAFE’s suggestions for fostering faster economic growth related to cutting regulatory red tape, and at this point both of them are being addressed.

•The current administration has cleared the way for completion of the Keystone XL pipeline, after years of federal delays. State environmental approvals for the route through Nebraska are still pending, however, and a pipeline spill last week may not aid the cause of finally putting this issue to bed. Keystone oil pipeline leaks in South Dakota as Nebraska weighs XL,,

•The Environmental Protection Agency has announced plans to rescind the Clean Power Plan, one of the key elements of the agency’s previous campaign to curtail the use of coal and other fossil fuels for generating electric power. Given no signs of legislative action, this is the next best thing. EPA chief [Scott] Pruitt announces end of Clean Power Plan, Sally Persons, Washington Times,

More generally, considerable progress has been made in ending the tidal wave of regulations that developed during the waning years of the Obama administration. These adjustments bode well for US economic growth, and we applaud them. Regulatory rollback: energy policy,
7/31/17; financial services, etc., 8/7/17.

See also Trump vs. the deep regulatory state, Christopher DeMuth, Wall Street Journal,

With some exceptions (such as business as usual on ethanol), and putting aside a few heavy-handed tweets (such as raising the idea of revoking broadcast licenses from purveyors of “fake news”), President Trump has proved to be a full-spectrum deregulator. His administration has been punctilious about the institutional prerogatives of Congress and the courts. Today there is a serious prospect of restoring the constitutional status quo ante and reversing what seemed to be an inexorable regulatory expansion.

The president has been quick to cite the second and third quarter results as evidence that the economic policies of his administration are working, but this claim strikes us as improbable because there simply hasn’t been enough time for the policy changes to have much effect. A more likely explanation is that the global economy overall has been picking up steam of late – with continued progress expected - and the US is sharing in the benefits. Goldman Sachs says if you thought 2017 was surprisingly good, just wait for 2018, Fred Imbert,,

[Goldman analyst Charles] Himmelberg and his team expect the global economy to grow 4 percent next year for several reasons, including strong growth momentum, easing financial conditions, global monetary policy remaining "highly accommodative by historical standards" and the likelihood of fiscal stimulus in the U.S.

All things considered, the outlook for US economic growth appears favorable. And if a tax cut is enacted in the near future, as is appearing increasingly likely, it should provide additional fuel for the fire.

POLICY SUGGESTIONS: (1) Maintain the trend towards sensible regulatory policies. (2) Avoid foolish moves in the international trade arena, such as withdrawing from the North American Free Trade Agreement with Canada and Mexico or starting a “trade war” with China. (3) Don’t allow the economy to overheat and set off an inflationary spiral.

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The federal minimum wage has not been repealed, as SAFE suggested in 2013, but at least it has not been increased. Some state or local governments have seen fit to raise the minimum wage within their respective jurisdictions, in some cases with dubious results.

Reinstituting work requirements for supplemental nutritional assistant payments (SNAP) have reportedly had a big impact in some jurisdictions. Food stamp rolls plummet in states that reinstate work requirements, Jennifer Hickey,,

The unemployment rate was down to 4.1% in October 2017. It’s unlikely to go much lower given the time lag that is typically involved in the job search process. However, the workforce participation rate at 62.7% could increase if more Americans who aren’t currently seeking employment came back into the work force. Economic news release, summary table A, Bureau of Labor Statistics,

The workforce participation rate peaked around 2000 and has declined substantially over the past decade. Among the reasons: more seniors are retiring, and relatively generous welfare benefits are motivating low skilled workers not to work. Labor force participation ticks up [this didn’t last], Andy Kierz,,

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The current focus is on worker compensation versus jobs per se – with many complaining that robust hiring has not been accompanied by pay increases. Study: Americans say job openings are increasing but wages aren’t,,

•A recent survey conducted by The Pew Research Center found that nearly half of all Americans (49%) feel as though their family’s income is falling behind the average cost of living. Forty percent of those surveyed said their incomes were staying about even with cost of living increases, while only 9% felt like they were getting ahead.

•A study showed that, over the past year, more than half (52%) of American employees did not experience any wage increase at all. Meanwhile, the consumer price index for all items increased 2.2% during the 12 months ending in September, according to the Bureau of Labor Statistics.

Claims that wages will go up as a result of cutting business taxes is one of the key arguments for enacting the Republican tax plan that is currently on the table. New report: Tax reform will raise wages at least $4,000 on average,,

POLICY SUGGESTIONS: (1) It would be helpful to raise the workforce participation rate, thereby minimizing the number of working age Americans with “time on their hands.” Consider pruning welfare benefits for people able to support themselves (work requirements for food stamps was a start), monitoring disability awards more carefully, gradually raising the eligibility age for senior benefits, and slowing the influx of immigrants. (2) Let pay rates be set by supply and demand without government intervention (pressure on business firms to pay their workers more, a big hike in the minimum wage, etc.). There is “no free lunch,” as is well known, and faster wage growth could fuel an inflationary spiral with undesirable consequences (see next section).


U.S. inflation averaged 1.3% for the period 2013-2016. Consumer Price Index data for 1913-2017,, accessed 11/18/17. The average rate for the last 12 months was 2.0%. Consumer Price Index, Bureau of Labor Statistics, October 2017.

Some observers believe the official inflation data are understated, notably a private consulting economist (John Williams) who has published an alternative inflation rate series since 2004 on the website. By his reckoning, the true rate of inflation is currently about 6%.

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Given the inherent difficulties of computing overall price levels for a consumption basket that includes more and more services and products that didn’t used to exist, it seems clear that the “accuracy” of the official data should not be taken for granted. The price-level dilemma, Richard Rahn, Washington Times,

There are accurate measures of what a bushel of wheat cost in 1800, 1900, 2000 and today but a smaller and smaller portion of the average person’s income is spent on basic commodities. Thirty years ago, the internet barely existed, and smart phones and tablets had not been invented. Look at all the apps that you use in your smartphone or iPad, then write down on a piece of paper what the cost of all of those items would have been if you had bought them separately three decades ago — camera, TV, alarm clock, books, music, calculator, all the newspapers from around the world that you can now get for free, global almost-free phone calls and many more. Potentially, you have bought millions of dollars of goods and services for a few hundred dollars.

And even if the official data are accepted as the best available measure of general price level trends, it should be borne in mind that an annual inflation rate of 2% (22%/ 10 years) or 3% (34%/ 10 years) can have a considerable impact over time – benefitting debtors who can repay in less valuable dollars while harming lenders and people living on fixed incomes.

It might seem strange, therefore, that the US Federal Reserve – which is charged with maintaining the stability of our monetary system – has maintained so insistently that a 2% inflation rate should be the official policy goal and that failing to hit it is worrisome. Yet this has been the Fed party line in recent years, and some economists contend the target inflation rate should be even higher. One simple action the Fed refuses to take could make its policies a lot more powerful, Pedro Nicolaci da Costa,,

Some have suggested that the real goal of the inflation target is to impose a stealthy tax on wealth. Perhaps that seems cynical, but it is more logically coherent than other explanations that have been offered. The price-level dilemma,
op. cit.

The only reason nominal prices have risen since governments left the gold standard and moved to fiat currencies over the last hundred years is that they have used excess money creation as a less visible way of taxing. Part of the reason clever people have been trying to develop alternatives to government monopoly money, such as Bitcoin, Ethereum and the others, is to make the new monies a better measure of value.

The Federal Reserve’s dual mandate (support monetary stability and full employment) has not been abolished as SAFE suggested. But Chair Janet Yellen will be replaced by Jerome Powell when her term ends in February 2018, and an era of exceptionally relaxed monetary policies (near zero interest rates, massive portfolio of securities being held to minimize long-term interest rates) is coming to an end. Trump nominates Jerome Powell for Federal Reserve’s top job, Donna Borak et al.,,

There has likewise been no repeal of the requirements to blend growing amounts of ethanol in motor fuel, which were enacted during the Bush 43 administration. Fiscal visionaries at bay,

Why should the government mandate the use of ever more ethanol? Producing ethanol from corn is ruinously inefficient, not to mention its adverse effects on food prices and the environment. It may eventually be possible to produce ethanol from switch grass and such, but the technology has yet to be developed on a commercial scale.

Good question, and the disadvantages of the ethanol blending mandate have become increasingly apparent as the phase-in progresses. Farmers and some business firms benefit no doubt, but the required use of ethanol has adversely impacted refiners, gasoline distributors and motorists. All things considered, this is an uninspiring example of crony capitalism at work. A recent report relates the failure of administrative efforts to relax the requirements. EPA chief Scott Pruitt has “epiphany,” sides with ethanol industry in key policy fight, Ben Wolfgang, Washington Times,

Mr. Pruitt’s EPA had been considering lowering the mandated volumes under the RFS, allowing exported fuel to count toward the yearly quotas, and other steps deeply opposed by biofuels proponents. The EPA chief changed course after a nearly unprecedented public relations campaign from ethanol industry leaders and key lawmakers such as Sen. Chuck Grassley, Iowa Republican, who threatened to hold up several top-level EPA nominees until Mr. Pruitt changed course on the RFS.

Despite a declining unemployment rate and signs that economic growth is quickening, the inflation rate (as officially measured) has remained relatively modest. This could change if the economy continues to heat up, however, and there are indications that faster price increases may already be on the way. Rising rents, health[care] costs reflect inflation poised to surge,,

U.S. consumer prices barely rose in October as the boost to gasoline prices from hurricane-related disruptions to Gulf Coast oil refineries were unwound, but rising rents and healthcare costs pointed to a gradual buildup of underlying inflation.

POLICY SUGGESTIONS: (1) The Federal Reserve’s dual mandate has encouraged the conceit that central bank is an uber boss of the economy, and as such responsible for fueling economic growth and maintaining full employment. A more realistic role for the Fed would be to keep the monetary system running smoothly and attempt to maintain overall price stability. (2) The ethanol blending requirements drive up motoring costs for no good purpose, and we would suggest again that they be repealed. (3) More generally, sensible regulatory policies can not only contribute to economic growth (as previously discussed), but also help to restrain price inflation for the benefit of all consumers.

Oops, we’re out of space and time for this economic survey update. Tune in next week for discussion of the funding of government services, taxes, and some overall conclusions on what the “next crisis” is likely to look like.

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