Economic problems don’t always have economic solutions
In a recent New York Times article, Nobel Prize Laureate in Economics Paul Krugman stated that “darkness is spreading over our society as evidenced in increased mortality rates resulting from suicide and excessive drinking, particularly among middle-aged white Americans.”
He goes on to say that social programs, including Obamacare, are not enough to cure existential despair. I think he’s right. I believe economic problems don’t always have economic solutions. Perhaps this is the greatest fallacy of the discipline of economics.
That said, let’s start this forecast with some current statistics pertaining to the economy.
The personal savings rate is 4.8 percent — not as high as 13.9 percent in 1975, but evidence that households are saving money. Price increases are holding steady on an annualized basis. Even if we remove energy and food, inflation remains at a subdued rate of 1.9 percent. If we include energy and food, inflation has been negative since July. While personal consumption expenditures remain solid, as does consumer sentiment, we expect a flat holiday retail season.
Disposable personal income rose 4.8 percent in the third quarter helped by the price of crude oil falling below $41 per barrel. In 2011, oil was $114 per barrel.
The addition of 271,000 workers in October brought U.S. employment to the second-highest level since 1999. The unemployment rate of 5 percent is the lowest since April 2008. Average hourly earnings of private-sector workers rose at a 2.5 percent annual pace. That marked the best year-over-year performance since July 2009.
The not-so good-news is that total outstanding credit is $3.5 trillion, up almost $1 trillion from five years ago. Student loans are $1.3 trillion. U.S. debt of $18.63 trillion is now 101 percent of GDP. In 1980, it was 30 percent of GDP.
Considering all these factors, my estimate for U.S. growth in 2016 is 2.5 percent.
While “Star Wars — The Force Awakens” opens Dec. 18, “currency wars” have been ongoing for several years in the world theater. Against emerging markets, the U.S. dollar is at a 13-year high. Some might argue this is more a factor of relative U.S. strength and less a result of countries devaluing their currencies. However, the truth remains the dollar is stronger against virtually all major currencies. The strong dollar has helped put downward pressure on corporate profits with U.S. companies posting their largest decline since the Great Recession.
This devaluation or depreciation has provided little benefit to the rest of the world, particularly the emerging economies, in their effort to move out of economic stagnation. While these countries were supposed to save the U.S., worldwide currencies have fallen dramatically. The ruble is down 56 percent, the euro down 28 percent, the yen down 38 percent and the Canadian dollar down 40 percent. Dollar strength will continue to be a drag on U.S. exports and will clearly hurt global trade, already at a point of virtual no-growth. We could see a dollar revolt similar to the U.S. anger toward the yen in the ’60s and ’70s, and the French disdain for the U.S. dollar during the time of Charles de Gaulle.
The first real threat from a U.S. interest rate hike could fuel the already strong dollar, thereby further reducing the growth of exports. The second real threat of the Fed’s rate hike could be a dampening effect on auto sales, home sales and overall consumption spending — potentially causing increased short-run volatility in the equity markets, and all combining to slow GDP growth. The rate hike, due to Janet Yellen’s indecisiveness and unwillingness to act, is much too late and at an inopportune time.
It’s not difficult to conclude deflation is huffing and puffing at the door. Even the “house” made up of the BRICS nations (the five emerging economies of Brazil, Russia, India, China and South Africa) can’t stand up to this threat. Russia and Brazil are in recession. China will have its slowest growth in 20 years and already is in a deflationary mode. South Africa had a negative third quarter and will average no more than 1.5 percent growth for the year. Among the BRICS, India is the only bright spot at 7.3 percent growth.
My prediction on the political front is that, unless there is moral outrage, Hillary Clinton will be our next president. Why? In part, it’s unlikely there will be significant economic outrage from low- and middle-income earners even though Republican candidates try to stir it up.
On a local level, while being labeled both “cool” and “beer” city might be entertaining to some and intoxicating to others, it’s not what this city was built on. West Michigan’s foundation was one of faithfulness to family, faithfulness to God and faithfulness to work.
Foundations matter. If the problem, as Krugman described, is existential despair, and if neither economists to the right nor to the left have sufficient solutions, then we must not fully depend on government or on public universities. Rather, we must rely upon faith-based institutions to provide a context for learning and understanding business and economics — a foundation rooted in biblical Christianity that produces faithfulness in its students and the economy’s future employees.
Adam Smith may not have been a Christian, but he thought and wrote in a setting that was primarily Christian. We need to both affirm and promote that context. Without that context we will be up to our own devices in determining right and wrong, social values, economic worth and the means of distribution. A world void of institutions of higher learning whose teleology is to please their Creator moves from morality to amorality to immorality. Krugman is right, but we have the opportunity to prove him wrong.
Brad Stamm, Ph.D., is an economics professor and chair of the Division of Business at Cornerstone University.