This is a confusing time:
- Lousy fiscal policy — way too much borrowing by the government
- Lousy monetary policy — way too much expansion of the monetary base, and for little good reason, and funding the deficits of the government as a result…
- Negative real interest rates on Treasuries 15 years out; that is financial repression, and that can’t happen without the Treasury and Fed conspiring to do so.
- Low equity market valuations, but only because profit margins are abnormally high.? There are reasons to think that profit margins will not mean-revert this time, because the increase in the global capitalist labor pool is depressing wages.? Wages may remain low for a longer time than many expect.? Sorry to the laborers, but there are more of you than the globe can accommodate.? Thus I remain agnostic on high profit margins; let’s revisit the issue when wage rates rise.
Personally, I think that the fiscal multiplier is negative.? Spend money on government projects, many of which do not build value for the economy, and the economy grows slower or shrinks.
We would do better with austerity.? The economy would grow faster with a balanced budget, and a sense that government was not out of control.? Shrinking the bureaucracy and its rules, would allow the economy to grow faster.? Delegate more responsibilities to the states, particularly regulation of financial companies.? Relatively few insurers fail, which are state-regulated.? Many banks fail, which are federally regulated.? It is far easier to co-opt a single federal regulator than many state regulators.? Best yet, split all of the too big to fail banks into 51 entities, divided into the states and DC.? No more interstate branching — that’s the real problem, not Glass-Steagall.
Limiting banking to states keeps it small, Glass-Steagall tinkers at the edges, but if banks are kept small by limiting their size by states, like insurers, they won’t become systemic problems.? Simple, huh?
Much like the AT&T breakup, I think a breakup of interstate banking would be good for the US economy.? It would unleash competition in financial services, and would eliminate systemic risk in the financial economy.? And once banking regulation is returned to the states, like insurance, we can eliminate the Fed, which has been a poor regulator of banks, and a bad manager of monetary policy.? Go back to a gold standard, or at worst a currency board.? Get money out of the hands of the government, who diverts much of the economics back to themselves.
Let me try:
Real interest rates: what is their natural value? You seem to imply they should be naturally positive. But why? They might have been positive when you were a young lad, but is that an intrinsic property or merely incidental? Like any market, ultimately it’s a question of demand and supply. Treasuries are a branded wealth storage technology being offered by a monopoly (at the brand level) supplier. If more people want that particular brand of wealth storage technology than the supplier makes, then the price as expressed by interest rate can go negative, that is the storage function value is greater than the compensation for delayed consumption that positive rates represent. That is when people want to store value more than they want to be compensated for not consuming now, the real rate goes negative. It’s simply the market at work, no need to make up a conspiracy theory. And you’re advocating that the US Treasury supply less of their popular wealth storage products, which can only make the rate more negative, unless somehow the demand goes down.
Labour pool issues cannot possibly explain higher margins beyond short term friction effects. In markets, if incumbents have excess margin, competition will shrink it as people start new companies to capture the free money being on offer by undercutting the incumbent. If the input costs go down (for whatever reason) then the margin will ultimately follow, unless there’s been a structural change that say impedes competition from doing its job (e.g. laws making it illegal to start new companies). That is, the profit margins will very likely reverse mean whatever happens on the labour market — or to any other costs, for example if commodity prices permanently collapsed, it will only help margins of commodity intensive businesses in the short term.
Money on government projects, when done as a short term Keynesian stimulus, does not work, as such, via the value added of the projects themselves. It works by giving money to people with a high propensity to spend: that is you pay salary to a previously unemployed road building guy, who spends it at the store buying a new lawn mower, the store pays the law mower manufacturers, who pay their employees, who buy more lawn mowers, etc, etc. Gov programs tend to employ people who are hand to mouth enough not to be able to save, hence a greater effect (targeted tax cuts towards a group with a similar propensity to spend would work similarly well). Of course at some point it stops working if people all start working on the government roads-to-nowhere programs because it’s so well paid and nobody is interested in making lawn mowers or anything that people actually want anymore. The whole useful, and tricky, part of debate is to find out where that particular tipping point is.
(Besides it’s pretty difficult for the government to totally waste money: it may be at times inefficient, but basically the core things they do is education, care of sick/old people, picking up garbage, and building roads that mostly do go somewhere, which, while not always strictly speaking economically productive, are generally nice things to have in a civilised society. I mean on a purely economic utility view you should just kill unproductive old people or anyone diagnosed with a terminal disease, but we like to be nice to them.)