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Managing The Economic Cycle (Part 2); Let’s Talk Turkey (again)*

Managing The Economic Cycle (Part 2)

Despite rumors to the contrary, Economic Cycles have not been repealed.

As the current Economic Expansion ages, the Fed and the U.S. government will face increasingly difficult economic challenges. Expansions always have been followed by contractions. This time will not be different. The only questions are “when?” and “how deep will the contraction be?” It can be modest … or world-shaking. Monetarists are fearful.

What should the Fed and the U.S. government be doing to ensure the continuation of economic expansion while minimizing the risks of a hard economic landing?

In order for Keynsians to be proven correct that the U.S. economy can successfully manage a soft landing by reconciling historically low interest rates and unprecedented national debt – that is, that the current expansion at worst will end with a mild recession –, at the very least the Fed will have to coordinate its monetary policies and actions with tough fiscal policies to be adopted by the U.S. government. Reliance on coordinated prospective actions by Congress and/or the President seems misplaced overly- optimistic. Any such coordination would require agreement between Republicans and Democrats as well as between a super-majority in both houses of Congress and the President, requiring an economic consensus totally absent today in Washington, D.C.’s heated political environment. (Although see “Will Modern Monetary Theory Work?” in the April 15th TLR.)

Nevertheless, if a coordinated consensus could be reached, it ought not to be based on the sort of centrally-controlled economic model popularized by China. It would be unAmerican economically imprudent for fiscal policy-making to continue in the direction the Fed has taken by relying to any extent purely on further government manipulation of centralized monetary and fiscal levers. Although American economic policy under the Fed’s leadership has drifted away from the laissez faire capitalism that made America’s economy great the most successful in history, economic policy should not be allowed to slip further. The U.S. has been the beacon of global economic opportunity because of America’s (1) devotion to democratic principles, (2) adherence to the Rule of Law (see “The Rule of Law” in the April 5thTLR), and (3) practice of unfettered American-style capitalism. They are the reasons for America’s historically-unprecedented success. They are the pillars that have supported Americans’ ever-increasing standard of living and America’s innovative economy and robust GDP growth. To be successful, capitalism requires that people, not the government, decide how best to deploy the country’s capital, leaving it mostly to Adam Smith’s “invisible hand” to determine where investments are best made, where factories are best built, where workers will find the best employment opportunities, and which businesses survive and fail. Centralized planning contemplates that those decisions are made largely by government employees … whose decisions are not likely to optimize growth, innovation or opportunity. Job creation requires job-creators, not government decision-makers. It would be counterproductive for the U.S. government to determine which industries should be favored and which disfavored (whether by subsidy or regulation or deregulation), or to provide incentives and disincentives to industries or businesses or locations (whether by way of tariffs or trade barriers or by funneling tax incentives and/or contracts to one industry or a given geographical area). Americans do best, and America does best, when Americans choose what to build, where to build, where to live, and how best to do so. That flexibility defines both capitalism and America. The 21st Century has seen unprecedented progress and unprecedented disruption. Capitalism has proven itself the optimal tool for adaptation to both.

Capitalism works best, and the U.S. economy will operate at its maximum level of efficiency, when the government’s role is limited – limited to protecting the rights of individuals (which requires carefully thought-out regulation and oversight, admittedly a challenge in a representative special-interest democracy), safeguarding democratic institutions (including free and open media), and ensuring that the Rule of Law remains robust. That’s been the mantra of American-style capitalism.

As one example, globalization is the inevitable offshoot of the world’s acceptance of American-style capitalism, and the U.S. and the world are the better for it. Neither Monetarists nor Keynsians believe that interfering with globalization through government intervention would be beneficial. In fact, doing so would be counter-capitalist and economically damaging to all participants, especially America. It therefore would be counter-capitalist and contrary to the interests of Americans for the U.S. to provide incentives for moving production to or from any one location to another, whether within or outside the U.S. History proves that such incentives would be disproportionally costly to Americans. Capital, jobs and innovation inevitably go where they are most welcome and where production is most efficient. That is the reality. Government interference in that mainstream capitalist pursuit inevitably creates both foreseeable and unintended consequences.

John Kenneth Galbraith said there are two types of economic forecasters, “Those who don’t know and those who don’t know they don’t know.” It’s difficult enough to get an accurate reading on where we currently are in the Economic Cycle. Figuring out where we are going is next to impossible. For example, interest rates, inflation and energy prices remain tame, employment continues to increase (employers added 263,000 jobs in April, well above the consensus forecast, and the unemployment rate in April sank to 3.6 percent, a 50-year low), GDP growth hummed along at 2.8{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in 2018 and is estimated to have grown 3.2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} in the first quarter of 2019 (although with some disturbing components), consumer confidence remains high and consumer debt is coming down, retail sales are good and the stock market is up significantly on the year. Put those together and the economy looks to be on a durable upward trajectory. On the other hand, housing starts and auto sales are weak as are consumer spending and business investment, the Federal government and various States continue to roll up huge deficits, there is partisan infighting between Democrats and Republicans that appears to doom necessary infrastructure programs as well as any other possible partisan or nonpartisan growth legislation, serious tariffs have been imposed on China (as well as on various allies) that negatively impact industry-specific businesses in the U.S. and global macroeconomic growth, the yield curve has hinted at an inversion which, in the past, almost invariably has heralded a recession, and there remains the danger of a black swan event or two. Put those together and it’s hard to avoid the realization that the downside risks to the economy are growing. With a few notable exceptions, however, the consensus of economists at this time is that an imminent contraction is unlikely.

There will come a time when that no longer is the case, when the numbers turn, when the threat of a contraction becomes apparent. At that time, something more than money-printing and interest-rate easing will be necessary. At that time, America will be on the verge of crisis and a coordinated monetary and fiscal response will be called for. Although it would be far better to address that future threat today, that possibility is foreclosed by political reality. What is possible today and what will be necessary in the future is for America to prepare detailed plans grounded in sound fiscal policies that will generate productivity gains, restart growth, encourage innovation, create high-quality employment opportunities and further global competitiveness, and to do all of it within a framework of budget affordability.

Until there is a crisis, Congress apparently will rely on Modern Monetary Theory and deficit spending to garner votes and avoid dealing with difficult fiscal policy decisions … and to attempt to defuse a rising tide of economic radicalism and political extremism. MMT and deficit spending will be used by Democrats and Republicans alike as an excuse to fund pet projects … and the resulting pork-barrel trade-offs will be sold to the public as bipartisan compromises at re-election time. MMT/deficit spending will permit politicians to avoid dealing with the potential negative economic consequences of their actions. It will provide them with a proverbial “free lunch.” As discussed in “Will Modern Monetary Theory Work” in the April 15thTLR, and “They’re All Keynsians Now” in the March 27thTLR, although MMT/deficit spending will likely prolong the current expansion, they are akin to overdosing on sugar, the result of which is a temporary sugar high … and a raging headache the next morning. However, if MMT/deficit spending funds programs that reduce inequality, that may also defer but not eliminate a day of inter-class economic and political reckoning. Should inequality get out-of-hand, anger will become too great to mollify and politics, geopolitics and economics are likely to become even more radicalized.

Unfortunately, America’s elected officials don’t recognize that their failures policies selfishly focus only on their re-election, but also might lead the country into economic chaos. They believe they are properly responding to modern exigencies, as well as to the resentments of the voting public. We can all only hope they are right. Only time will tell.

Let’s Talk Turkey Democracy

The April 1st TLR, “Let’s Talk Turkey,” addressed Turkey’s gradual slide into dictatorship. It also focused on the dismal state of Turkey’s economy resulting from mismanagement by the government of Recep Tayyip Erdogan. Erdogan’s mismanagement recently led to the election of an anti-Erdogan candidate, Ekrem Imamoglu, as major of Istanbul, Turkey’s largest city. A recount demanded by Erdogan’s Justice and Development Party failed to change the result. However, the Supreme Election Counsel earlier this week directed that a rerun election be held in June. The slide continues.

Finally (from a good friend)

I recently picked a new primary care doctor. After two visits and exhaustive lab tests, he said I was doing fairly well for my age (I am 70).

A little concerned about that comment, I couldn’t resist asking him, “Do you think I’ll live to be 80?”

He asked, “Do you smoke tobacco, or drink beer, wine or hard liquor?”

“Oh no,” I replied. “I’m not doing drugs, either!”

Then he asked, “Do you eat rib-eye steaks and barbecued ribs?”

I said, “Not much. My former doctor said that all red meat is very unhealthy!”

“Do you spend a lot of time in the sun, like playing golf, boating, sailing, hiking, or bicycling?”

“No, I don’t,” I said. “Too much sun causes skin cancer.”

He asked, “Do you gamble, drive fast cars, or have a lot of sex?”

“No,” I said.

He looked at me and said, “Then, why do you even give a shit?”

*┬® Copyright 2019 by William Natbony. All rights reserved.

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