The March FOMC meeting ended today, the Fed left rates unchanged, and financial markets are spinning their wheels attempting to guess what happens next—e.g., how many rates hikes this year? The Fed’s decision to pause their rate hikes in January has brought the stock and bond markets back from their December swoon.
The fact that so much market activity seems to hang on what the Fed does next shouldn’t be the case. Nor the tepid 2 percent GDP growth average since the end of the Great Recession; in spite of the various Quantitative Easing programs that have kept interest rates at record lows, and caused a record amount of public and private borrowing.
We are therefore now in an unvirtuous circle that will be difficult to escape. The Obama administration and some Republicans passed ARRA—the American Recovery and Reconstruction Act in 2009 to keep the Great Recession from turning into another Great Depression. It worked for a while, boosting growth in 2010, but wasn’t enough to bring those 8 million lost jobs back.
Keynesian and neo-Keynesian economists such as Paul Krugman kept protesting that the one-time $787 billion shot in the arm wouldn’t be enough, since the recession was world-wide. US GDP growth shrank -3.9 percent, the Euro Area’s GDP sank to -5.5 percent, and Japan’s to minus -8.8 percent in 2009 as a result of the Great Recession.
But the Obama all-Democratic administration was distracted by the push to pass Obamacare, and lost the House of Representatives majority to Republicans in 2010 (until the 2018 election). House Republicans then controlled the government purse strings and vowed to oppose every new spending bill the Obama administration proposed, resulting in government shutdowns and draconian government spending caps when public spending was most needed to boost economic growth and put Americans back to work—because the private sector was refusing to do so at the time.
Unemployment rose to 10 percent in 2010 before beginning its slow decline to the current 3.8 percent rate. But that is not quite full employment, as some 6 million unemployed adult-age workers sit on the sidelines, for one reason or another.
So the Fed had to resort to its own monetary policies to maintain some growth—mainly the QE security buy-back programs that pumped more than $4.5 trillion back into the economy—because of the absence of any meaningful fiscal spending policies by national governments that would create those badly needed jobs.
Those rock-bottom lending rates encouraged corporations to borrow to the max to boost their profits because economic growth hadn’t recovered, and the public to borrow to augment their lower paychecks.
These so-called austerity policies (i.e., cuts in government spending) held back meaningful economic grow for most of the decade since the Great Recession. Hence the unvirtuous circle the US economy is currently in. How to put more of the 6 million still unemployed back to work, which would boost tax revenues, without going even further into debt?
Firstly, inflation has to rise substantially to devalue such a huge debt load (currently $20 trillion in federal debt and rising)—when inflation has been falling. The fact that long term interest rates are back to 1950 post-WWII levels means that the Fed has to sell more of the $4.5 trillion in securities back to the public to decrease the money supply and raise interest rates further. But that announcement sent the financial markets into a tail spin in December.
Then economic growth has to be juiced in some way, such as with massive public spending on infrastructure and the like, which should also boost household incomes and tax revenues that would pay for some of that debt.
In fact, research has shown that public infrastructure spending more than pays for itself in generating additional GDP wealth—as much as 1.5 times the initial investment.
This CBPP graph tells the story of many of those unemployed 6 million. The employment-to-population ratio hasn’t even returned to pre-recession levels, and earnings are at a nine-year high, but the recovery is in its tenth year. The incomes of many of those hourly workers hasn’t yet returned to pre-recession levels either.
So what will lure them back to work to fill the record number of job openings reported in my last blog piece? It has to be more than the Federal Reserve regulating currency flows and interest rates.
Harlan Green © 2019
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