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An age of economic uncertainty
The U.S. and many of the world’s economies are in uncharted territory, where fiscal and monetary theory from the days of Keynes and Friedman are making attempts at being applied to an ever-changing set of circumstances.
Some have called it the “new normal.” However, normality presumes that’s the way it was or the way it should be. Rather, we have entered an age of uncertainty where the only guiding light seems to be the short-run use of cost-benefit analysis, at times void of ethical considerations.
This age of uncertainty humbles even the best, brightest and most arrogant economists. Alan Greenspan himself acknowledged, “I missed certain forecasts. I am a human being. I cannot see beyond the horizon any more than anyone else.”
Uncertainty has multiplied in the past several months due to the sequestration, followed in late 2013 by a congressional short-term reversal; the 16-day government shutdown resulting in political party disequilibrium; both the known and unknown effects of the Affordable Care Act; and the ongoing geopolitical crises in Turkey, Syria, Egypt and elsewhere.
This current age of uncertainty has had its impact on three key areas: consumer confidence, employment and business investment, the latter of which I suggest cash as its proxy.
The cautiously optimistic, protectionist, self-insurance mode of corporate America has focused on the bottom and not the top line, leaving few alternatives except to hold cash. Rising earnings don’t necessarily raise all ships, especially if you’re dry-docked — and by this I’m referring to the unemployed.
Due to this mentality, unemployment is at 6.7 percent, the number of unemployed at 10.4 million, and the longer-term unemployed now number 4.1 million. A meager 74,000 jobs were added in December. More and more people are leaving the labor force, and we are now at a 26-year low in the labor force participation rate. Thus, there is a clarion call for reduced fiscal constraint from Ben Bernanke and many major economists given the inability of monetary policy to solve our unemployment problems.
The amount of cash in the hands of households, banks and corporations is at an all-time high of $14 trillion. Sitting on cash is costly for everyone given that savings aren’t being invested and cash is losing its value due to inflation and a weakening dollar.
The positive signs in the past year include stock market gains at 20 percent. However, only 18 percent of the public holds stocks. Home values are up almost 13 percent from one year ago but as a percent of individuals owning homes in the country, we’ve fallen back to 1996 levels.
The U.S. government remains addicted to quantitative easing. Each less-than-stellar jobs and GDP report accompanied by low inflation numbers encourages the FOMC to likely continue their monthly purchases. As part of his legacy, Bernanke recently reduced tapering to a monthly $75 billion; however, further reductions will remain modest until non-farm payroll growth remains consistently above 200,000 per month. While tapering is expected to continue, the Fed’s commitment to zero interest rates for an indefinite period remains.
On a global level, all major central banks are keeping their interest rates at historic lows. The European Central Bank has set the world stage for even lower rates with its recent move to 0.25 percent while the U.K. reaffirmed its asset purchase program and kept its borrowing rate at 0.50 percent. The low rates both serve as a means of supporting the domestic economy and as a competitive measure by lowering the cost of capital which in turn encourages both spending and investment for the sovereign nation.
The added risk introduced by these low interest rates is that if debt service goes up a mere 1 percent, it will cost the global economy $510 billion per year, which is the equivalent of the aggregate income of those worldwide falling below the poverty threshold.
I don’t’ anticipate Janet Yelen, incoming Fed chairperson, to make a significant move away from the quantitative easing program, nor to make a philosophical shift to supply-side economics by backing off efforts to regulate banks and other financial institutions. Bernanke has set the stage and the script remains the same.
So more of the same in 2014: lackluster growth at 2.5 percent, entrenched long-run unemployment, and low inflation if not deflation, à la Japan, due to continued Fed intervention.
While the above might be a modestly dismal forecast, I don’t think we need to affirm the fallacy of division — that what is true of the whole is necessarily true of its parts. And we have the opportunity, if not the obligation, to do our part.
First of all, we live in a region of the country and the state where entrepreneurship has its history and its future and where, through sometimes single-handed ventures, the economy grows and families are fed.
Secondly, in uncertain times I believe free market principles, in the context of a Judeo-Christian framework, can provide the lamp that gives clarity to our long-run purpose.
Thirdly, I believe we have a responsibility to train and hire the unemployed with a focus not solely on bottom-line profitability but rather on “loving your neighbor.” That is the heart and soul of Grand Rapids and West Michigan.
Brad Stamm is a professor of economics at Cornerstone University in Grand Rapids.