It's slim pickings
Neither party's plans will get us out of the blah economy and ancient Sumerian finance
Photo by Pat Whelen on Unsplash
Hello,
Welcome to Known Unknowns, a newsletter that believes no one has a good record on the economy—but at least we are better at it than the ancient Sumerians.
Who’s better on the economy?
Tomorrow we vote (or will have already voted) in the midterm elections. Bloomberg asked me to weigh in on what I think of the Democrats’ versus Republicans’ economic records/plans. Now this is a bi-partisan newsletter, and I am equally disappointed with both parties when it comes to their economic records.
The nicest thing I can say about the Biden administration is that it wasn’t responsible for many of our current economic problems, though it did make them much worse. The large spending in 2021, for instance, was a significant factor in our current inflation. And while I am totally enthusiastic about infrastructure, granting unions a monopoly on such projects tends to result in enormous costs and near-eternal time lines. Fiscal expansion only increases growth (especially if you are not in a recession) if you pick projects that are useful and implement them without excessive waste. Neither the infrastructure bill nor the CHIPS Act fills me with much confidence. Overall, I am disheartened by the push for more industrial policies, more unions, less labor-market flexibility, more regulations, and little thought of debt.
But, well, at least the Democrats have a vision. I don’t like their vision, but it is intellectually consistent and they put it out there. And that is something. Because it seems like Republicans have no vision or consistency when it comes to the economy; it is just culture war, culture war… There used to be a vision: limited government. They did not always act on that vision when it came to their policies, but they had a philosophy. I no longer know what the Republicans stand for, perhaps because some Republicans are still for small government. Others, however, are into industrial policy, less trade, and less immigration. The only things they can all agree on are tax cuts and increased domestic energy production. Not bad things, providing they are part of a more comprehensive policy that reforms the supply side of the economy. But these things on their own (tax cuts, in particular) do little good.
The shift away from limited government may reflect a change in the electorate who, after the destabilizing effects of China entering the global economy coupled with a major technological transition, desire greater government involvement. And everyone likes low taxes. To be fair, so do the Democrats, albeit with the exclusion of high earners (but where they set the bar in their definition of “high earner” seems to outstrip the rise in inflation). So it would seem that everyone is now on the low tax–big government bandwagon.
But even if this policy proves popular in the short run, that does not mean it’s good policy. And if higher rates and exorbitant inflation are a new fact of life, it may just no longer be feasible.
Happy voting for those who participate.
The Blah economy
The employment report is out and the job market is still on fire, though perhaps the third derivative is slowing, which if you squint really hard can make you believe the Fed will pivot soon—even though it has been pretty clear it won’t, not until the levels or at least the second derivative change. But since so few people have any memory of the Fed doing contractionary policy, their strained read of the tea leaves is understandable.
It may also be that feeling in the air that this can’t continue: a hot labor market, high inflation, shortages, as well as high house prices and mortgage rates. It seems every time a new economic indicator comes out, we expect this to be the moment things will turn, and the inflection point is nigh. The Fed believes it and so do all the forecasters. So if expectations matter, maybe it is true?
Or maybe this point isn’t coming. Maybe, instead, we just hobble along with relatively low unemployment and wage increases that consistently lag behind inflation, accompanied by those feelings of scarcity and uncertainty that are what make inflation so toxic. Industries that were flush with capital and grew without discipline (like tech) will shrink, but the economy will just barely still grow. Equity markets are volatile but don’t really grow much either. I call it the blah economy. It is an economy where people have jobs and spend but still feel poor. It is probably better than a normal recession in the short-run, but it makes us worse-off in the long-run.
Breaking out of it will take serious supply-side reforms. And I don’t mean hiring union workers to make chips.
Goetzman on history, art, and finance
But don’t despair. In the grand scheme of things, it is not so bad. In fact, we’ve never had it so good.
I spoke to William Goetzmann, a finance professor at Yale and maybe the most interesting man on the planet. He is an expert in everything I find interesting: finance, history, and art. We spoke about the evolution of financial products and how they changed the world, enabling us to live safer, more secure lives. Who knew Sumerians had compound interests, the ancient Greeks became a big deal because they mainstreamed debt financing, and that annuities were one of the most important inventions since the wheel?
Until next time, Pension Geeks!
Allison