Larry Summers disclosed his latest macro insights at an IMF Meeting last November, which he elaborated upon in a Financial Times article: “We may . . . be in a period of ‘secular stagnation’ in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low interest rates.” In other words, we will continue to have weak GDP growth and high unemployment despite a zero Fed funds rate and low bond yields. This stagnation, he now claims, has been evident since 2000, which is why even the 2003-2007 housing bubble was not enough to spark rapid economic growth. (No word on why he failed to notice the secular stagnation of 2003-2007 until 2014.) Summers identifies three possible ways to escape “secular stagnation.”
- Supply side reforms such as improving labor force skills, increasing companies’ capacity for innovation, structural tax reform, etc. But this he dismisses on the grounds it will take too long.
- Super low interest rates. He rightly says we are already doing this but it isn’t working, and besides we can’t continue it forever without causing bubbles in asset prices.
- Aggressive Government Spending. “The third approach—and the one that holds most promise—is a commitment to raising the level of demand at any given level of interest rates, through policies that restore a situation where reasonable growth and reasonable interest rates can coincide. This means ending the disastrous trend towards ever less government spending and employment each year – and taking advantage of the current period of economic slack to renew and build up our infrastructure.” (Emphasis mine)
Secular Excuse
No offence, Larry, but it looks to me like you are concocting a phony, after-the-fact secular excuse for the spectacular failure of President Obama’s economic policies. Come to think of it, those were your economic policies, because you were Obama’s Senior Economic Advisor. The failure of your policies is not a surprise. Back in 2009 I wrote that we would have yet another “jobless recovery” that would be even worse than the prior two because of Obama’s anti-capitalist policies. And so it has come to pass; the employment population ratio is far below the level of the Bush administration and has not improved at all since the depths of the 2009 recession.
Larry’s simplistic model has just three variables – “supply side reforms,” monetary policy, and fiscal policy. What’s weird is that most Wall Street economists, who are paid to be right and twist in the wind when they are wrong, accept this model and ignore the structural impact of Obamanomics—which is why most of them have been too bullish on growth for the past few years. On “Bloomberg Surveillance with Tom Keene,” you can hear well-paid, erudite PhD’s go on for hours about the U.S. economy without ever mentioning structural issues such as Obamacare. Tom should remind them it was “structural reforms” in Germany’s labor market, 2003-05 ,that revived the putative “sick man of Europe.” Structural reforms, including deregulation and supply-side tax cuts, likewise rescued the U.S. from 1970s “stagflation.” It’s not all about fiscal and monetary policy, Larry.
“Stagnation” Solution: Un-do Obamanomics
Forget secular stagnation. The path to growth is obvious: Reverse Obama’s many anti-capitalist sins of commission and omission, which have collectively killed “animal spirits” and hiring in the private sector. To name a few:
- Obama’s rhetorical attacks and tax hikes on “millionaires and billionaires” have convinced job creators (including the CEOs of MMM, INTC, ETN, WYNN, L, JPM & EMR) that the U.S. is a bad place to invest.
- As political comedian Mark Steyn noted, the $823 billion “stimulus” package managed to do the seemingly impossible—spend immense sums on “infrastructure” without building a single major improvement that anyone can point to. Money was wasted on weaning America off fossil fuels just as the fracking revolution was cutting energy costs and CO2 emissions.
- The EPA attacked the energy and utility industries, among many others.
- Dodd Frank enveloped the banking system in miles of red tape that discourage banks, especially community banks, from lending to small businesses.
- Attacking JPM with huge fines, including—most ludicrously—fines for failure to detect the Madoff fraud when the SEC failed to do so despite explicit, detailed warnings from Harry Markopolos, which were the subject of a Barron’s article.
- Obamacare raises labor costs for small and medium-sized businesses and creates strong incentives to stay small (under 50 workers) and use part-time workers (under 30 hours per week.) Companies have spent millions of hours coping with unnecessary disruption of their healthcare benefits. No wonder they’re not hiring.
- Failure to OK the Keystone XL Pipeline.
- Failure to reform the U.S. tax code, not even the ludicrously uncompetitive corporate tax regime. This keeps $1-2 trillion of corporate cash stranded off-shore.
- Failure to reform immigration, which would increase entry of much-needed high skilled and low skilled workers.
Killing Factory Jobs and Hurting the Poor in India
Much as Larry’s lousy policies have hurt America’s poor, over-regulation has stunted growth in India. I know little about India but have always wondered why its economy is so weak even though the country produces thousands of immensely talented emigrants who have made huge contributions to the U.S. economy. So, with few preconceptions, I read two books with contrasting perspectives on the topic that were featured in The New York Review of Books.
Sen’s Sins
An Uncertain Glory: India and Its Contradictions, by Jean Dreze and Nobel Prize winner Amartya Sen, discusses Indian economic growth and “argues that the country’s main problems lie in the lack of attention paid to the essential needs of the people.” In prose that I found to be weirdly windy, gauzy, elliptical, garbled, turgid, convoluted, complicated, tortuous, abstract, and repetitively convoluted and complicated Dreze and Sen claim the state needs to intervene in markets if economic growth is going to help the common man and woman. A couple of excerpts:
Those who dream about India becoming an economic superpower, even with its huge proportion of undernourished children, lack of systematic health care, extremely deficient school education, and half the homes without toilets . . . . have to reconsider not only the reach of their understanding of the mutual relationship between growth and development, but also their appreciation of the demands of social justice, which is integrally linked with the expansion of human freedoms.
The case for going beyond private profit calculations in making economic decisions is strong, particularly in a country like India. The existence of what economists call externalities – like the pollution of air or water, or denuding of natural resources—tends everywhere to drive a wedge between private gains and social benefits….A further reason for avoiding complete reliance on private-sector allocations is poverty and inequality. Since profitability is conditional on the ability of the purchaser, or the consumer, to pay, private profits can often be a very inadequate guide to the priorities of public need. Some of these problems can be dealt with by instituting appropriate taxes and subsidies….
Left unsaid by Dreze and Sen is that India has long followed a socialistic approach to economic development, with politicians and intellectuals wringing their hands about inequality while a corrupt, inefficient bureaucracy does much to keep the poor poor by mismanaging large parts of the economy. The electricity grid, for example. Blackouts are very common; one in 2012 plunged half of India into the dark. Yet even though they admit “lack of responsibility seems to run through all the layers of hierarchy,” Sen and Dreze oppose privatizing electricity for reasons that remain obscure. They opine, “The bankruptcy of the power sector in India is part of a general political problem that has to be addressed at an overall level and involves the need to resist (or counter) the political influence of privileged pressure groups.” Whatever that means.
How Regulation Kills Factory Jobs in India
In Why Growth Matters, Jagdish Bhagwati and Arvind Panagariya offer a point-by-point rebuttal to India’s socialistic approach to development. It turns out that excessive regulation, very reminiscent of Obamacare, creates strong incentives for small firms to stay small—which is a major reason why India has failed to develop labor-intensive manufacturing industries such as apparel and footwear, which require large firms that can achieve economies of scale to compete with giant factories in China, Vietnam, Cambodia, Thailand, etc. Bhagwati and Panagariya tick off the many penalties and burdens that India’s oh-so-moral social planners heaped on firms that made the mistake of hiring too many poor people:
- For manufacturing units with 10 workers using power and with 20 workers not using power, the 1948 Factories Act:
- Limits worker hours to 48 per week;
- Limits work without a day of rest to 10;
- Requires a paid holiday for each 20 days of work;
- Prohibits employing children under 15 years of age;
- Bans employing women for more than 9 hours per day;
- Factory premises must be kept clean, with whitewashing every 14 months and repainting every 5 years;
- Separate washrooms for men and women;
- Uninterrupted supply of drinking water;
- Factories with 150 workers must provide lunchrooms.
- At 250 workers factories must provide a canteen.
- If the firm employs 30 women or more, a day-care center must be provided.
- The 1952 Employees Provident Fund and Miscellaneous Provisions Act requires three types of benefits:
- a contributory provident fund,
- pension benefits to the employees and their family members,
- insurance for sickness, maternity benefits, etc.
- The list of burdens on employers goes on and on.
These requirements are costly and require extensive paperwork, and they create plenty of opportunity for official corruption. So the good news is that Indian laws require factories that, on paper, are great places to work. The bad news is, there aren’t many factories, and Amataya Sen has to dream up excuses for why India lags far behind China in reducing poverty and improving the lives of ordinary workers—even though India had a thirty year head start in building a modern capitalist economy. And back here in the U.S., Larry Summers is confecting the excuse of “secular stagnation” in a pathetic attempt to explain away the failure of Obamanomics, which he helped to design.
Copyright 2014 Thomas Doerflinger. All Rights Reserved.
