Free Enterprise in Three Minutes with Ray Keating – Episode #84: What Government Needs to Get Right to Help the Economy

 Ray Keating explains what limited government needs to do so that the economy functions properly.

2008, Obama, Trump and 2% Growth

by Ray Keating

The Keating Files – March 11, 2020

Amidst banter over the economy on Fox Business News early this week, reporter Susan Li asked, “What’s wrong with two percent growth?” Well, actually, a heck of a lot.

Now, I’m not picking on Ms. Li, in particular, as many of her colleagues in the financial news business think that two percent real economic growth is just dandy. Indeed, in the political world, it apparently depends on who happens to be sitting in the Oval Office as to whether or not two percent growth is good or bad. For example, Republicans criticized a recovery/expansion period under President Obama in which economic growth averaged 2.2 percent, but Democrats argued it was just great. And now, with the Trump presidency, real growth averaging 2.5 percent is a downright great economy, according to Trump and the GOP.

To put this all in perspective, since 1950, real GDP growth has averaged 3.3 percent, and during economic recovery/expansion periods (that is, factoring out recessions), growth averaged 4.4 percent. So, 2 percent, 2.3 percent or 2.5 percent doesn’t cut it.

Some actually ask: What real difference does this make? 

Well, consider the “Rule of 70.” What is that? Divide 70 by the average annual real rate of growth, and one arrives at the number of years it takes for GDP, income or living standards to double. At 5% annual growth, it takes 14 years for real living standards to double, while at 1%, it would take 70 years. At 2 percent, it takes 35 years for living standards to double, while at 3.3 percent, it’s 21 years. These differences matter, having substantive effects on human beings. 

Last month, Barack Obama tweeted about his signing of the American Recovery and Reinvestment Act 11 years earlier, claiming that it paved “the way for more than a decade of economic growth and the longest streak of job creation in American history.” Naturally, President Trump had to respond, “Did you hear the latest con job? President Obama is now trying to take credit for the Economic Boom taking place under the Trump Administration. He had the WEAKEST recovery since the Great Depression, despite Zero Fed Rate & MASSIVE quantitative easing. NOW, best jobs numbers ever.”

And on it goes. Quite frankly, neither of these guys should be all that excited about the economy of the past 11-plus years in which they resided in the White House. 

The December 2007 to mid-2009 recession still matters, in a certain sense. Again, in terms of the key economic number, real GDP growth from 1950 to 2007 averaged 3.6 percent. From 2008 to the end of 2019, growth averaged a mere 1.7 percent, that is, less than half of where we should be.

To further drive home the problem, let’s focus on the full years during this current economic recovery/expansion period, that is, from 2010 to 2019. If the U.S. economy had grown at an average rate of 4 percent (not even at the 4.4 percent historical norm), then the 2019 economy (measured by real GDP) would have been $3.5 trillion larger in 2012 dollars than it actually was. That’s $3.5 trillion in real lost output!

Indeed, 2008 matters. The credit meltdown and falling into what often is referred to as the Great Recession left a deep mark. Some lost faith in free enterprise. Others came to fear trade and immigration. Still others came to see government as some kind of savior. In reality, the lesson from the 2008 economic mess and its aftermath should be the gross failure of government. 

For example, an aggressive “affordable housing” regulatory and spending agenda incentivized bad loans and laid the foundation for the housing/mortgage mess. Government bailouts, stimulus efforts and loose money failed to revive strong economic growth. We should have snapped back from that deep recession, but we didn’t. Increased taxes and regulations made matters worse, and played key roles in a poor recovery. And the U.S., under Obama, moved to the global sidelines in terms of international trade, and then, under Trump, moved aggressively in a protectionist direction. That hasn’t worked out, with U.S. businesses facing increased costs, fewer opportunities and reduced incentives for investment, and trade paring back economic growth, rather than feeding it as had been the case for most of the post-World War II period.

The tax and regulatory relief achieved so far under the Trump administration has been a plus, but it has not been enough given what happened under Obama, and given Trump’s own costly trade, government spending and, in certain areas, regulatory (like antitrust) policies.

No, two percent growth is not positive, and it should not be considered the norm for the U.S. economy. A pro-growth agenda of substantive and permanent tax and regulatory relief, advancing free trade, reining in government spending and monetary policy focused on price stability would get the U.S. back on a robust path of economic growth, which would make a real difference for every American.

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Ray Keating is a columnist, an economist, a novelist (his latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12^thbook in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction), a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. You can also order his forthcoming book Behind Enemy Lines: Conservative Communiques from Left-Wing New York – signed books or for the Kindle. The views expressed here are his own.

A Coronavirus Recession Likely

by Ray Keating

The Keating Files – March 10, 2020

Whether the coronavirus meets the worst or best of expectations in the United States, it’s difficult to see how a recession is missed – or at best, narrowly avoided with growth slowing to a crawl.

Consider that despite the happy talk – or tweets – emerging from assorted political sources, the U.S. economy has not been rocking and rolling. In fact, after some respectable growth numbers from mid-2017 through the third quarter of 2018, the economy has slowed notably since, with real GDP growth averaging only 2.1 percent over the past five quarters.

For good measure, real business investment (as well as overall private investment) has declined in the past three quarters (i.e., the second quarter through the fourth quarter of 2019), and trade has been drag on the economy for the past two years.

Finally, much of economic growth over the past two-plus years has been about the consumer. However, the consumer is a follower, not a leader. Consumers take their cues from what’s going on with business. That is, if new enterprises are being started, and businesses are investing and hiring, then consumers are pleased and spending. While entrepreneurship has been lagging, businesses have been hiring. But given the recent decline in business investment and the uncertainties of the coronavirus, business investment is likely to continue to falter, in the near term, and along with it, now, hiring.

To sum up, when you look at the current status and coming months, there’s little positive to see for major sections of the U.S. economy. Private investment is likely to continue to falter (or at best stagnate), trade will continue to be a drag, and the consumer is likely to be hunkering down. That combines to spell either a recession or no growth in the short term.

Another question to ponder: Is the U.S. well-positioned from a policy standpoint so that economic growth snaps back afterwards – either later this year or into 2021? Consider that we were not positioned to do so after the last recession, and have since suffered through an under-performing recovery/expansion period since mid-2009. Quick answer? Trade policy remains anti-growth, as does government spending (with big spending increases over the last two years). Taxes generally have been a policy positive since December 2017. The regulatory story has been mixed, but overall a net plus. And monetary policy remains unhinged from economic reality, with the hope being that Fed cluelessness continues to be corrected or ignored by the private sector.

Oh yes, and then there’s this presidential and congressional election thing coming in November?

Snap back or no, then? It’s hard to tell. My best guess is that a short recession or no-growth period is followed by a short snap back, and then barring some strong pro-growth policy changes, the economy falls back into the slow-growth scenario that we’ve suffered under for too long.

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Ray Keating is a columnist, an economist, a novelist (his latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12^thbook in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction), a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. The views expressed here are his own.

The Fed is Impotent

by Ray Keating

The Keating Files – March 2, 2020

All sorts of talking heads and incessant Tweeters in politics and on Wall Street cry out for the Fed to act in the face of the spreading coronavirus. Specifically, they call for the Fed to cut interest rates (i.e., the federal funds rate) and do another round of quantitative easing (i.e., pumping more money out the door).

As markets have dropped due to uncertainty swirling around the coronavirus, it’s painfully ridiculous to assume that the Fed could do anything to make a difference. But politicians and many in the financial industry have bought into the mistaken assumption that the Fed is some kind of all-powerful entity when it comes to the economy. 

That most assuredly is not the case. In fact, the Fed has proven to be impotent for at least a dozen years now.

Consider that since the late summer 2008, the Fed has been running insanely loose monetary policy – so loose that is has no precedent in U.S. history – and yet we suffered through one of the worst, if not the worst, recession since the Great Depression, and a grossly underperforming recovery/expansion period since mid-2009.

For example, the Fed expanded the monetary base - that is, the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve) from $875 billion in August 2008 to $3.45 trillion in February 2020 (actually topping $4 trillion at points in 2014 and 2015). At the same time, excess bank reserves went from a mere $1.9 billion in August 2008 to $1.5 trillion in February 2020. Even with the Fed reining things in the monetary base a tad from September 2017 to September 2019, there remains no lack of liquidity. 

Meanwhile, real GDP growth has averaged a rather woeful 2.3 percent since mid-2009. That compares to average growth of 3.6 percent that prevailed from 1950 to 2007, and during recovery/expansion years over that period, the average had been 4.4 percent. That is, real economic growth has been running at nearly half of what it should since mid-2009.

Nonetheless, apologists will proclaim that the Fed somehow saved the U.S. economy during the 2008-09 mess and afterwards. In reality, the best that could be said about Fed monetary policy since 2008 is that it made no difference. More likely, such unprecedented looseness added to the uncertainty that contributed to sluggish growth.

And now the Fed’s minions are looking for a further loosening of monetary policy. Their answers, though, to questions as to how this would actually make a difference in the current situation remains, to be generous, elusive.

The Fed can do nothing positive while this unfortunate coronavirus scenario plays out – indeed, nor can the White House or Congress (other than accelerating the drug approval process for pharmaceutical companies). However, poor decisions certainly could create further negatives now and after the coronavirus fades away to become a grave and unfortunate memory.

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Ray Keating is a columnist, an economist, a novelist (his latest novels are The Traitor: A Pastor Stephen Grant Novel, which is the 12^thbook in the series, and the second edition of Root of All Evil? A Pastor Stephen Grant Novel with a new Author Introduction), a nonfiction author (among his recent works is Free Trade Rocks! 10 Points on International Trade Everyone Should Know), a podcaster, and an entrepreneur. The views expressed here are his own.

Free Enterprise in Three Minutes: The Big 5 Policies for Growth

Episode #6: The Big 5 Policies for Growth - What are the policies that allow economic growth to flourish? Ray Keating highlights the “Big 5” policy or institutional requirements that are essential to allowing economic growth to flourish.

Listen at iTunes at https://itunes.apple.com/us/podcast/free-enterprise-in-three-minutes-podcast-with-ray-keating/id1349576104

Or at Buzzsprout at http://www.buzzsprout.com/155969/666862-episode-6-the-big-5-polices-for-growth