Modern liberalism and Keynesian demand based economics continues its uninterrupted 80+ year record of failing to deliver the goods without massive deficit spending, anemic economic growth and high structural unemployment, yet the pixie dust and unicorns are as abundant as ever.
The Blame-Thy-Neighbor Economic Excuse
Faced with stagnation, the big economies cite vague ‘headwinds’ and play a devaluation tit-for-tat.
ENLARGE
Fed and Treasury chiefs Janet Yellen and Jack Lew in Washington, D.C., April 15. Photo: Getty Images
By
Kevin Warsh
33 COMMENTS
This will be the most consequential year for the global economy since the financial crisis for two reasons: Economic growth is likely to run below the already weak trend of recent years. And leading finance ministers and central bankers will need to improve upon the blame-thy-neighbor policies that have recently gained traction.
In the first quarter of 2016, according to data released Thursday by the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 0.5%. Over the last two quarters, growth has been running at about 1%, about half the plodding rate that marked the postcrisis period.
The U.S. business sector is not poised for a material upturn in growth. Nonresidential business capital expenditures are weak. Industrial production is down. Total corporate debt increased 25% over the last four years to $8.1 trillion, according to recent data compiled by the BEA. Despite lower net interest payments, corporate profits continue to decline. They now stand about 2.25 percentage points below their cycle peak. In the first quarter, S&P 500 profits fell 8%.
Yet the Federal Reserve insists that the demand side of the economy is in good shape—that full-employment is near and the American consumer is well-situated to increase spending.
I hope the Fed isn’t asking more from consumers than they are prepared to deliver: About 70% of Americans believe the economy is on the wrong track. Some speculate that these dour attitudes are due to rising income inequality. But anemic growth and flat incomes are a more obvious, if less politically salient, explanation.
What say the finance ministers and central bankers of the largest economies in the world? As they gathered recently in Shanghai and Washington, D.C., they offered a common, if circular, refrain: Each of their domestic economies would be growing nicely, thank you very much, but for “global developments.” Blame-thy-neighbor is the new way to rationalize the malaise.
In truth, the domestic economies in most countries continue to underperform the heralded, persistently optimistic forecasts published quarterly. Rather than fault their own policy choices or question the accuracy of their dominant economic models, policy makers have concluded that the errors invariably belong to their foreign counterparts. They assign these errors a name: “headwinds.” But seven years of headwinds suggests a problem not with the weather, but the climate. And the climate is increasingly one of excuse-making, rather than responsibility-taking.
From the middle of 2014 through 2015, U.S. policy makers encouraged other central banks to follow the Fed’s lead and pursue larger and more expansive rounds of quantitative easing. They did. Yet stubbornly low nominal growth persisted. Unconventional monetary policies—meant to spur demand—were having diminishing effects. So policy makers looked around for other means to stimulate their economies.
Foreign central banks showed a new eagerness to lower their exchange rates to boost exports. Currency devaluation by many of America’s trading partners took the form of verbal and actual intervention, still-looser monetary policy, and, for some, the adoption of negative interest rates. From mid-2014 through 2015, foreign currencies weakened on a trade-weighted basis by 22% against the dollar. The Japanese yen dropped by 16% and the euro by 20%.
The corresponding strength of the U.S. dollar appears to have surprised and troubled American policy makers. Earlier this year, Fed Chair Janet Yellen explicitly cited the dollar’s foreign-exchange value as having important bearing on the pace of Fed tightening. At recent G-20 meetings, Treasury Secretary Jack Lew made abundantly clear his disapproval of these foreign currency movements. Market participants took special note of the U.S. government’s new posture. In 2016 to date, the trend reversed sharply: The dollar is now the currency following the devaluation path, about 5% to 10% weaker against most of America’s major trading partners.
Is the U.S. calling out its peers to end the policy of competitive devaluations? Or, more alarming, has Washington thrown up its hands and gotten into the game of trying to steal demand from others in a low-growth global economy?
The Fed is right that economies don’t die of old age. But they do die of policy error. Officials in Washington seem all too willing to try to steer, if not set, the value of the dollar. The resulting volatility is anathema to economic growth. Currency stability is one of growth’s best friends. Yet it is squandered if the U.S. pressures and scapegoats its neighbors for the failings of its own domestic economic policies.
That these currency fights are happening should not come as a surprise. They often occur late in business cycles, when policy makers consider their other alternatives limited. Currency skirmishes are a sign of diminished confidence. Zero-sum economics is not pretty, and need not be permanent. Nor should we cower to the preachers of secular stagnation who say that our fates are sealed.
The U.S. should lead the world in driving a growth-enhancing agenda, and fast. Washington must pursue policies that create new demand, rather than sanction an economic tit-for-tat that merely diverts demand among contesting countries. Supply-side, structural reforms—including radical tax reform and pro-competition regulatory reform—would propel domestic growth, and show the world a better way forward. Then the dollar and other currencies would move into a more stable, sustainable equilibrium—one that promotes long-term economic strength for the U.S. and its neighbors alike.
Mr. Warsh, a former Federal Reserve governor, is a fellow at Stanford University’s Hoover Institution and a lecturer at the Stanford Graduate School of Business.
The Blame-Thy-Neighbor Economic Excuse
Faced with stagnation, the big economies cite vague ‘headwinds’ and play a devaluation tit-for-tat.
Fed and Treasury chiefs Janet Yellen and Jack Lew in Washington, D.C., April 15. Photo: Getty Images
By
Kevin Warsh
Kevin Warsh
The Wall Street Journal
CANCEL- BiographyKevin Warsh
33 COMMENTS
This will be the most consequential year for the global economy since the financial crisis for two reasons: Economic growth is likely to run below the already weak trend of recent years. And leading finance ministers and central bankers will need to improve upon the blame-thy-neighbor policies that have recently gained traction.
In the first quarter of 2016, according to data released Thursday by the Bureau of Economic Analysis, the U.S. economy grew at an annualized rate of 0.5%. Over the last two quarters, growth has been running at about 1%, about half the plodding rate that marked the postcrisis period.
The U.S. business sector is not poised for a material upturn in growth. Nonresidential business capital expenditures are weak. Industrial production is down. Total corporate debt increased 25% over the last four years to $8.1 trillion, according to recent data compiled by the BEA. Despite lower net interest payments, corporate profits continue to decline. They now stand about 2.25 percentage points below their cycle peak. In the first quarter, S&P 500 profits fell 8%.
Yet the Federal Reserve insists that the demand side of the economy is in good shape—that full-employment is near and the American consumer is well-situated to increase spending.
I hope the Fed isn’t asking more from consumers than they are prepared to deliver: About 70% of Americans believe the economy is on the wrong track. Some speculate that these dour attitudes are due to rising income inequality. But anemic growth and flat incomes are a more obvious, if less politically salient, explanation.
What say the finance ministers and central bankers of the largest economies in the world? As they gathered recently in Shanghai and Washington, D.C., they offered a common, if circular, refrain: Each of their domestic economies would be growing nicely, thank you very much, but for “global developments.” Blame-thy-neighbor is the new way to rationalize the malaise.
In truth, the domestic economies in most countries continue to underperform the heralded, persistently optimistic forecasts published quarterly. Rather than fault their own policy choices or question the accuracy of their dominant economic models, policy makers have concluded that the errors invariably belong to their foreign counterparts. They assign these errors a name: “headwinds.” But seven years of headwinds suggests a problem not with the weather, but the climate. And the climate is increasingly one of excuse-making, rather than responsibility-taking.
From the middle of 2014 through 2015, U.S. policy makers encouraged other central banks to follow the Fed’s lead and pursue larger and more expansive rounds of quantitative easing. They did. Yet stubbornly low nominal growth persisted. Unconventional monetary policies—meant to spur demand—were having diminishing effects. So policy makers looked around for other means to stimulate their economies.
Foreign central banks showed a new eagerness to lower their exchange rates to boost exports. Currency devaluation by many of America’s trading partners took the form of verbal and actual intervention, still-looser monetary policy, and, for some, the adoption of negative interest rates. From mid-2014 through 2015, foreign currencies weakened on a trade-weighted basis by 22% against the dollar. The Japanese yen dropped by 16% and the euro by 20%.
The corresponding strength of the U.S. dollar appears to have surprised and troubled American policy makers. Earlier this year, Fed Chair Janet Yellen explicitly cited the dollar’s foreign-exchange value as having important bearing on the pace of Fed tightening. At recent G-20 meetings, Treasury Secretary Jack Lew made abundantly clear his disapproval of these foreign currency movements. Market participants took special note of the U.S. government’s new posture. In 2016 to date, the trend reversed sharply: The dollar is now the currency following the devaluation path, about 5% to 10% weaker against most of America’s major trading partners.
Is the U.S. calling out its peers to end the policy of competitive devaluations? Or, more alarming, has Washington thrown up its hands and gotten into the game of trying to steal demand from others in a low-growth global economy?
The Fed is right that economies don’t die of old age. But they do die of policy error. Officials in Washington seem all too willing to try to steer, if not set, the value of the dollar. The resulting volatility is anathema to economic growth. Currency stability is one of growth’s best friends. Yet it is squandered if the U.S. pressures and scapegoats its neighbors for the failings of its own domestic economic policies.
That these currency fights are happening should not come as a surprise. They often occur late in business cycles, when policy makers consider their other alternatives limited. Currency skirmishes are a sign of diminished confidence. Zero-sum economics is not pretty, and need not be permanent. Nor should we cower to the preachers of secular stagnation who say that our fates are sealed.
The U.S. should lead the world in driving a growth-enhancing agenda, and fast. Washington must pursue policies that create new demand, rather than sanction an economic tit-for-tat that merely diverts demand among contesting countries. Supply-side, structural reforms—including radical tax reform and pro-competition regulatory reform—would propel domestic growth, and show the world a better way forward. Then the dollar and other currencies would move into a more stable, sustainable equilibrium—one that promotes long-term economic strength for the U.S. and its neighbors alike.
Mr. Warsh, a former Federal Reserve governor, is a fellow at Stanford University’s Hoover Institution and a lecturer at the Stanford Graduate School of Business.
