Wednesday, September 21, 2016

Would the Fed Please Shut Up?

At the beginning of 2016, the Federal Reserve Board anticipated four quarterly interest rate hikes for the year.  Three quarters of the way through the year, the Fed hasn't lift rates even once.  And it's far from certain it will in December.

Why such a divergence between expectations and reality?  In a nutshell, because economists can't predict the future.  Essentially all leading and well-regarded economists get it wrong when they try to predict future economic growth.  Since the Fed is an economist-driven agency, it devotes a lot of time and energy to being wrong.  And it has been wrong early and often this year.  It's probably wrong in suggesting a significant likelihood of a December increase.  The truth is it has no way (i.e., zero percent probability) of knowing whether or not it will raise rates in December.  Its capacity for error has been copiously demonstrated and its "guidance" is worth less than a palm reader's prognostications.

Who benefits from the Fed's "guidance"?  Not investors, who only profit if they disbelieve what the Fed says.  Not consumers, whose bank accounts and certificates of deposit, money market accounts, bond holdings, pensions, and long term care insurance policies are being devastated by the perpetuation of Lilliputian interest earnings.  Those who would prepare for the future with life insurance and annuities face ever-escalating costs.  Comfortable retirement is increasingly available only for those who have both very high incomes and a ferocious propensity to save.  Everyone else will become a burden on public retirement financing.  Anyone who thinks the government will be balancing the budget by cutting the cost of Social Security and Medicare is chilling on angel dust.  Tax increases and more deficit spending will be necessary--full stop, end of discussion.  The bulk of retirees will be largely or entirely dependent on the government and any thought of cutting retirement benefits will prompt a political insurgency that would make this year's election look like a circle of kindergartners singing Kumbaya.

There are people who benefit from the Fed's "guidance."  Speculators, who make fast money bets on what some Fed official or other will say in the next three days.  Derivatives dealers, who write contracts for those who want to hedge or speculate about the Fed's "guidance."  Pundits and journalists, who try to say something profound about every cough or facial tic from one Fed official or another.  Stock and bond market dealers, who profit when the market churns each time a Fed governor smiles or frowns.  In other words, Wall Street is making money off of this.  But the "guidance" isn't making an overall contribution to the well-being of society.

The Fed used to be pretty discrete.  Back in the 1950's and 60's, we had robust growth, low unemployment, and ebullient optimism, all without a stream of prattle from the Fed.  There's no obvious need for the Fed to yack, yack, yack all the time.  We could do without all the false expectations created by inaccurate Fed prognostications.  Would the Fed just please shut up?

Wednesday, September 14, 2016

Does the Internet Hamper Economic Growth?

The sharing economy--Uber, Airbnb, Zipcar, bike sharing and so on--makes more efficient use of resources.  Cars that might sit around are instead used more often.  Living space that might remain empty provides accommodation.  People don't have to buy a bike any more.  They can just rent the short term use of one. 

But does all this sharing hinder economic growth?  If people use cars, bikes, homes and other things more efficiently, fewer of these items need to be produced and sold.  Manufacturers may see decreased demand.  Jobs may be lost.  Growth could slacken.  The country's tax base might stagnate, just at a time when increased government funding is sought for everything from national defense and security to infrastructure repair and expansion to Social Security and Medicare.

Gig-based employment could have similar implications.  People who work short term gigs tend to earn less than full-time employees, reducing their ability to contribute to the consumer demand that comprises 70% of America's economy.  Employers have little or no incentive to improve the abilities and productivity of gig employees, so improvements in worker productivity could be hampered.  Without productivity growth, we won't have long term gains in employee compensation or national wealth.  Gig employees may be unable to save significantly for retirement, which would place more of the burden of their golden years on public funding.  These increased tax burdens could further impair growth.  As gig-based employment grows, so would these problems. 

The Internet greatly enhances globalization.  Customer support centers in Third World countries can inexpensively serve the needs of corporations in the industrialized world.  All manner of services, from manufacturing to radiology to routine legal work, can be cheaply coordinated and/or delivered from distant, low wage places over the Internet.  Workers in America who provided those services are out of luck.

The Internet provides the communications process that allows the sharing economy, gig-based employment, and globalization of services, to operate.  But greater micro-economic efficiencies such as these may have negative macro-economic implications.  One of the great mysteries of modern economics is why the economy is growing so slowly.  Increased efficiency creates losers as well as winners.  Those losses will have aggregate impact eventually, when they grow large enough. 

The Internet is an astonishingly effective conveyor of information.  But, as regards the sharing economy, gig-based employment, and globalization, owners of assets, holders of capital, and employers benefit more than employees--except employees willing to work for lower wages  The Internet may have enhanced total global economic growth.  But the distribution of that increased growth may well favor low wage countries, leaving industrialized nations with dimmer futures.   

It's impossible to stop the march of technological advance.  But the Internet is almost too effective in cutting costs and creating efficiencies.  When artificial intelligence and robots have driven millions of people out of the labor force, leaving them penniless, economic stagnation may be more likely than prosperity.  We had damn well better come up with a way to maintain social equilibrium in such a circumstance, or the political insurgencies of today will seem like gentle summer breezes.