- The U.S. has become a nation preoccupied with
consumption over investment; outsourcing its jobs, hollowing out its
middle class, and accumulating increasing debt burdens to do so.
- U.S. wages and salaries have plunged to the
lowest share of GDP in history, while the civilian labor force
participation rate has dropped to levels not seen since the 1970’s. Yet
consumption as a share of GDP is near a record high. This gap between
income and expenses has been financed by debt accumulation, encouraged
by the Federal Reserve’s policy of zero interest rates, and enabled by
fiscal policies that prioritize income replacement rather than targeted spending and investment.
- Since December 1999, total civilian employment among individuals 55 years of age and older has increased by 15.3 million jobs. Yet total
civilian employment – including those over 55 – has grown by only 13.8
million jobs. This means exactly what you think: outside of workers 55
years of age and older, Americans of working age have 1.5 million fewer jobs today than 15 years ago.
- There are now more than 46 million Americans on
food stamps, with SNAP (Supplemental Nutrition Assistance Program)
expenditures increasing five-fold since 2000.
- While transfer payments and entitlements have
increased, government consumption and investment as a share of GDP have
declined to near the lowest levels in history. In effect, fiscal policy
has been heavily biased toward income replacement, but has
otherwise been a deer in the headlights in the face of repeated
economic crisis. While the contribution of private investment has
slowed to a crawl, fiscal policy – except for transfer payments – has
actually been in retreat.
- In the investment sector, real gross private
domestic investment has grown at a rate of just 1.5% annually since 1999
(versus a 4.7% real annual rate in prior decades), with growth of just
1% annually over the past decade. Yet while real capital accumulation
in the U.S. has weakened, corporate profit margins have never been
higher.
- In an economy where wages and salaries are
depressed, but government transfer payments and increasing household
debt allow households to bridge the gap and consume beyond their
incomes, companies can sell their output without being constrained by
the fact that households can’t actually afford it out of the labor
income they earn. Meanwhile, our trading partners are more than happy
to pursue mercantilist-like policies; exporting cheap foreign goods to
U.S. consumers, and recycling the income by lending it back to the U.S.
in order to finance that consumption.
- Debt-financed consumption, while it proceeds
unhindered, is a central driver of elevated corporate profits. Unusually
elevated corporate profits (a surplus) are largely a mirror image of
unusually large deficits in the household and government sectors.
- The most reliable stock market valuation measures (i.e. the measures that have a nearly 90% correlation with actual subsequent
stock market returns) are those that explicitly take account of the
level of profit margins and mute the impact of that variability. These
measures suggest that the S&P 500 Index is likely to be lower a decade from now than it is today (though dividend income should bring the total return to about 1.5% annually).
- Even if the Federal Reserve was to immediately
reduce the monetary base by one-third (from nearly 24 cents of monetary
base per dollar of GDP to a smaller 16 cents of monetary base per
dollar of GDP), short term interest rates would still be zero.
- Once we account for movements in the Federal
funds rate that can be captured by a fairly simple linear policy rule
such as the Taylor Rule, additional activist monetary policy
(deviations from that rule) have effectively no ability to explain
subsequent changes in GDP or employment. There is a strong economic
justification for proposals that would require the Fed to outline
Taylor-type policy guidelines, and to explain deviations from those
guidelines. These proposals should be advocated by Republicans and
Democrats alike.
- Yield-seeking speculation promoted by the
Federal Reserve caused the housing bubble and the resulting global
financial crisis. A change in accounting rules by the Financial
Accounting Standards Board in March 2009, not extraordinary monetary
policy, is what ended that crisis.
- The true Phillips Curve is a relationship between unemployment and real wage
inflation, it cannot be usefully exploited by monetary policy, and it
is the only version of the Phillips Curve that actually exists in
empirical data. Pursuing general price inflation does not somehow “buy” more jobs. It also does not raise real wages. It lowers them.
This spells a very UGLY future!
