In the foreword to The Brookings Institution’s Hamilton Project’s latest exercise, there’s an unusual passing mention of the damage bad economic moments in the US can cause around the world.
It’s customary for US researchers & writers to focus on the US, ignoring wider effects of US decisionmaking, pretty much as inconsequential collateral damage. It’s those wider effects – the wash of the tidal wave – that concern me.
The subprime securities episode that began to take effect in 2007 and exploded into widespread economic disaster in 2008 had varying impacts around the world.
Eventually, economies achieved different versions of recovery, but the causes weren’t addressed. US presidents Bush Junior & Obama ordered up stimulus programmes – Bush a cautious dose, Obama an overdose – but neither president nor their administrations went to the cause, banking sector delinquency, to prevent a recurrence.
Stimulus programmes require trust. Why should borrowers who’ve just been shafted trust an administration determined not to fix the cause of the crisis?
Australian group keeps pushing for bank separation
An oddball US campaigner on financial issues (with a large dose of conspiracy theory), Lyndon LaRouche, who died in February, has had an Australian following for 30 years through the Citizens’ Electoral Council (CEC), which has campaigned since the global financial crisis to separate banks’ commercial & investment operations.
That separation in the US came in 1933, 4 years after the 1929 stockmarket crash, through the Glass-Steagall Act, but was repealed in 1999 for being too restrictive in a freer economic climate – which, typically, is the precise moment when some restriction makes sense.
In passing, the Citizens’ Electoral Council’s latest newsletter, out today, makes an acid comment on the Australian federal election outcome: “There are numerous reasons Bill Shorten’s Labor failed to convince Australians to elect them to solve their problems, but there is one obvious reason. Inexplicably, Labor let Scott Morrison off the hook on the banks.
“It is extraordinary that in the immediate wake of the Hayne banking royal commission which proved that the banks are vast criminal enterprises, it was not an election issue. That was Labor’s choice.”
Separation remains unlikely
Unless there’s an epiphany, the re-elected Australian Government can be expected not to adopt a more aggressive stance towards the banks.
That separation of investment banking from the traditional commercial role remains universally unlikely, if only because people elected to positions of power aren’t willing to be seen as spoilers, so the syndrome of the frog in water being slowly brought to the boil remains apt.
The primary reason for international economic & financial concern now is that the US appears unwilling to stop the stimulus, allowing public debt to rise steeply. It’s now over $US22 trillion and the new man in charge, Donald Trump, a heavy debt user – and heavy defaulter – through decades of business activity, will manipulate ups & downs to his own advantage. Constraining the rise of that public debt won’t be his concern.
At the moment he is working on getting himself re-elected. He might engineer a downturn over the next 9 months, but will have the economy humming into next year’s presidential election, supported by the absence of restraint on the debt mountain and tweaked through trade wars, potential armed warfare and campaigns of both misinformation & distraction.
Given that the couple of dozen Democrat candidates will spend most of the next 12 months fighting among themselves rather than focusing on their common enemy, and none of them is looking like a presidential campaign winner, Mr Trump looks at the moment like a shoo-in for November 2020 re-election.
Back to the economists
Back to The Hamilton Project, launched at the Brookings Institution in Washington in 2006 as an economic policy initiative.
The project’s website sets out this description of intent, effectively aiming for stability combined with economic growth:
“From its first strategy paper, the project set forth a clear policy path to promote our nation’s economic health, a strategy based on 3 interrelated principles: that economic growth must be broad-based to be strong & sustainable over the long term; that economic security & economic growth can be mutually reinforcing; and that an effective government can improve economic performance. These ideas, especially in combination, offer a strikingly different vision from the economic policies that contributed to the alarming trends in rising income inequality & a mounting federal deficit.”
Given that this was a serious purpose stated in 2006, you could be forgiven for collapsing on the floor in a fit of hysterical laughter. Especially at the last sentence.
New York Times Upshot writer Neil Irwin wrote about The Hamilton Project on 16 May in an article with this heading, How to prepare for the next recession: Automate the rescue plan, and this sub-heading, Deciding in advance how the government fights downturns could make them less severe and avoid political gridlock.
Mr Irwin opened: “When the economy goes south, the US traditionally has 2 ways of dealing with it. The Federal Reserve cuts interest rates. And Congress passes spending increases or tax cuts to try to put more money into people’s pockets.”
Then he outlined how those approaches were flawed – interest rates are so low there’s no room to cut them in a downturn, while politicians don’t like supporting their opponents’ chances of re-election: “Money tends to go wherever lawmakers have the most clout rather than where it would do the most to stabilise the economy or help people who are suffering.”
Enter the term “automatic stabilisers”. 2 thinktanks, the Hamilton Project & the Washington Centre for Equitable Growth, got answers from a group of scholars and put those responses in a joint paper.
According to the foreword of the policy paper, “recessions are inevitable”. I argue that US policy decisions, or non-decisions, pre-global financial crisis (this paper uses the revisionary term “Great Recession”, a handy way to reduce the appearance of a wider impact) were intended to keep people happy, versus making them dislike the rulemaker by taking tough, expansion-limiting decisions.
The intention – which was successful until the sub-prime boilover and returned to being successful with the extravagant largesse to the banks of stimulus – was to create the illusion of a stable & well run economy.
The foreword’s writers argue that “policymakers should learn about proposals to help the next recovery start faster, make job creation stronger and restore confidence to businesses & households so they resume investing & spending again. Enacting these proposals in fully reasoned detail before the next recession strikes will help us avoid the delays & risks associated with writing stimulus legislation in the middle of a meltdown….
“The boost to the economy from such automatic stabilisers [some are listed in the links below] can be timely, aimed at populations impacted by the downturn and designed to end when conditions improve…
“Although automatic stabilisers do exist, they are relatively small in the US compared with those in other countries. At the same time, there have been frequent discretionary policy changes made in the face of economic downturns to push more money into the economy via tax cuts, direct payments or increased spending… Whereas federal taxes provide a substantial amount of automatic stabilisation – and discretionary federal policy is also strongly countercyclical – state & local fiscal policy is slightly procyclical.”
Automatic? Doesn’t suit
It doesn’t suit this US administration to adopt any notion of automatic for its economy, as Mr Trump must surely have made plain to every economist & policy deviser when he talked the Federal Reserve down from raising its funds rate.
But if this president & his successors keep plumping for economic courses which suit their short-term objectives and defeat longer-term sense, automatic adjustments to the major economic signals aren’t going to happen.
I hear plenty of expectations of financial collapse, many of them as a means of promoting products to save you from Armageddon.
But, in a speech on Monday at a Florida conference – topic, Mapping the financial frontier: What does the next decade hold? – US Federal Reserve chair Jerome Powell sought to calm the finance sector. In summary, he said:
- First, business debt is near record levels, and recent issuance has been concentrated in the riskiest segments
- Second, today business debt does not appear to present notable risks to financial stability
- Third, we cannot be satisfied with our current level of knowledge about these markets, particularly the vulnerability of financial institutions to potential losses and the possible strains on market liquidity & prices should investors exit investment vehicles holding leveraged loans.”
You can read details from Mr Powell’s address in a related story (link below).
New York Times, 16 May 2019 (paywall may apply): How to prepare for the next recession: Automate the rescue plan
The Hamilton Project, papers
Fed chair Powell sees risks but not overly concerned
Attribution: Brookings Institution, Citizens’ Electoral Council.