In his May address on economic outlook, President Jeffrey Lacker had much to say. He claims that we can expect a growth rate around 2% for the foreseeable future. This is a positive testament to our resilience considering the nature of our most recent recession, he says. This doesn’t seem terrible. Slow progress is progress nonetheless. Dr. Lacker mentioned a few key figures and points I’d like to share, and then a crucial statement that warrants quotation.
Two significant components to growth are productivity per worker and inputs. He notes that from 1950-2000 worker productivity was about 1.8%, yet in the recovery is has only been 1% (despite a sugar rally in ’09). Productivity is influenced by research and development, entrepreneurship and innovation, labor skills, and public infrastructure – Dr. Lacker is quick to mention that monetary policy is not on that list. I will discuss this later.
Inputs had a similar rate of 1.7% 1950-2000, and 1.1% post-recovery. Inputs include employment, so this is a key figure to monitor when examining our outlook. If businesses are not able to add more inputs, it stands to reason that less people will be put to work. Let’s parse the issue of employment.
Unemployment has fallen at around .7% per year since the recession, and that is faster than the past two cycles, he says. A more stark statistic Dr. Lacker points out, however, is a rapidly shrinking labor force participation rate. It has fallen from 67% to 63.3%, much ado to people that have given up looking for jobs. This is a structural issue that is not easily influenced by monetary easing. With the aforementioned low productivity, the lower participation rate significantly hinders our growth outlook. That means workers producing less on top of there being less workers.
There are some positive figures that he shares. Housing activity, although not a heavy mover of overall GDP, is rapidly picking up. Consumer expenditures make up a much larger portion of output, and needs to be a leader in raising our growth rate, Dr. Lacker argues. Businesses are also starting to spend more, which is a figure he likes. It rose 5.5% in 2012, and he expects even more this year. I would argue that if we want consumers to spend more, we need to be making more things that maximize their utility. This would go full circle to the lower productivity.
The government is not helping matters, he says. The massive debt and deficits, as well as no consensus in sight on where to tax or cut spending, he claims, are feeding into a populous already extra-cautious from recessionary income shocks. There is also a Euro-zone crisis that Dr. Lacker thinks is hurting our exporting opportunities.
This was his overall statement on our economic outlook. All things considered, 2% is not a bad accomplishment given the factors that are hurting output. If we could pursue such a figure, there could be a semblance of relative normalcy from the sluggish drudgery that has been our economy.
With that in mind, I’d like to shift gears to recent monetary policy. Given the structural issues that we are facing it would seem that easing would not be a way to help the issue. Dr. Lacker agrees,and says that,
“In this situation, to me, the benefit-cost tradeoff associated with further monetary stimulus does not look promising. The Fed seems unable to improve real growth despite striving mightily over the last few years, and further increases in the size of the balance sheet raise the risks associated with the exit process that’s going to accompany withdrawing stimulus when the time comes to withdraw stimulus. That’s why I do not support the current asset purchasing program.”
Stimulus cannot impact the real factors influencing our growth, so it seems to be moot. Instead, the Fed would be better off merely fostering a monetary climate that cultivates certainty and enables optimal transactions. As mentioned in an earlier post, this would be most effectively accomplished through interest rate targeting.
These asset purchases are only exacerbating the structural problems that are hurting output and growth. Perhaps this is slowly being realized by policymakers who in a recent statement hinted at the possibility of reducing the amount they are buying. But what does $85 Billion a month really matter when you have no limit, right?
In the opening lecture to my undergrad Money and Banking course, the professor opened with the Chinese curse, “May you live in interesting times.”
We are living in interesting times.