Jay Pelosky, who serves as principal of J2Z Advisory LLC, a global asset-allocation and portfolio-strategy consultancy, wrote in Friday’s Wall Street Journal that the outlook for global growth in 2014 could be very troubling.
His rationale is multifaceted, but part of it concerns something I’ve been keeping an eye on for the past several years: The U.S. Federal Reserve Board has been keeping interest rates artificially low since the financial crisis in 2008 in the hope that this would stimulate job creation. It has failed.
The last two months’ job creation numbers were exceedingly weak, and while the U-3 unemployment rate has dropped to 6.6 percent (assuming they did not cook the numbers, and I would not assume that), and while the U-6 unemployment rate remains above 12 percent (which includes workers who have stopped looking), the economy is failing to produce enough jobs to even keep up with the growth of the nation’s population.
The Fed’s policies aren’t generating sustained economic growth either, as annualized growth has remained well under 3 percent. The scary that some of us have always understood, is that you can’t keep interest rates artificially low forever. Interest rates should be a product of market forces like capital availability and demand for loans, as well as the risk being incurred by lenders. Instead, the Fed has essentially ignored these factors and kept interest rates close to zero in the pursuit of a political goal.
As a matter of fact, when I served on the Board of the Kansas City Federal Reserve District Bank, we would recommend changes in the interest rates to keep the economy from growing too fast or growing too slow. But when the rates are virtually zero as they are now, you are stuck on "slow to no" growth, because there's no room to go lower in order to stimulate market forces.
Now that Janet Yellin has succeeded Ben Bernanke as chair of the Federal Reserve, market forces will bring pressure on her to adjust interest rates to a level that more accurately reflects market forces – and that means they would have to go up.
The problem with that? There is no feasible growth strategy coming behind it to pick up the slack. Not that the Fed’s intervention was a feasible growth strategy, mind you – it was like trying to force GDP to run on fumes for lack of a better idea. It was bad monetary policy in lieu of pro-growth economic policy. It didn’t spur growth in the U.S., and as Pelosky points out, other nations that pursued ill-advised policies (like Venezuela and China) are looking at economic trouble as well. Even China, where GDP growth is 7 percent, is struggling with credit policy. And the U.S. stock market started showing signs this week that it’s not too confident about growth in 2014.
An environment like this desperately calls for pro-growth policies out of Washington. It calls for a simplified tax code with lower rates. The best solution would be to replace the tax code altogether, which I have constantly proposed, but it will never even be considered with this White House and Congress.
Pro-growth policies also call for less regulations. They call for the elimination of the tax on repatriated profits, which would make it easier for U.S. companies who earn capital overseas to bring that capital back home. They call for a lot of other things too, among them the repeal of ObamaCare, which we saw this week is expected to disincentivize a lot of people right out of the labor force.
But Washington isn’t talking about anything of the sort. They’re talking about raising the minimum wage and other redistributionist schemes to address “income inequality.” There are no serious growth strategies on the table for consideration.
That’s pretty troubling in an economic environment that is already failing to produce jobs or GDP growth, and now may lose the fumes that were fueling what little economic energy we had. President Obama has never had a pro-growth agenda, and the Republicans in Congress don't seem to have a clue as to how to move him in that direction. They can’t even control federal spending when they hold the power of the purse in the Republican controlled House.
If Pelosky is reading the global signs correctly, and Washington remains in its usual state of cluelessness about how to spur growth, 2014 could be a brutal year.
