Difference of Opinion

There’s obviously a difference of opinion between the Federal Reserve governors and the Trump Administration on the likely rate of economic growth over the next few years, both reflected in opinion pieces at the Wall Street Journal. First, the editors of the WSJ recount the Fed’s estimate:

The median forecast of the board and Fed presidents moved up a tick to 2.5% this year from 2.4% in September. And it moved to 2.5% in 2018 from 2.1%. Beyond that the Fed’s fearless forecasters have the economy falling back to near 2% and even lower in the “longer run.”

while in an op-ed Phil Gram and Thomas R. Saving give something closer to the administration’s view:

In the past eight years, private loan demand has been weak in an economy kept in a stupor by high taxes and an avalanche of regulations. In this stagnant environment, the Fed has been able to manage a massive balance sheet and inflated bank reserves without igniting inflation or causing interest rates to rise, further crippling growth. But the Fed’s challenge will grow enormously when the economy returns to normal growth. That will drive up the demand for bank loans, increase interest rates, and induce banks to lend excess reserves. The money supply will start to grow.

Neither Sen. Gramm nor Dr. Saving define what they mean by “normal growth”. Clearly, they don’t mean normal for a developed economy. That’s what the Fed governors are predicting. I presume they mean normal for the United States before the boom-bust cycles began which would be between one and two percentage points higher than that.

I’ve already expressed my skepticism about the likelihood of the measures taken to date by the Trump Administration’s having the results they think it will, at least not without further constraints. I believe that the reforms will create growth somewhere—probably in producer countries like China, India, Japan, and South Korea rather than in the consuming United States. That’s my explanation for the shortfall in business investment, the obvious cause of our slower growth. Businesses are investing all right. They’re just not investing in the United States the way they used to.

I think it’s also worth mentioning that the Fed’s policy is best explained as a recognition as a strategy for avoiding pulling out the rug from under banks they don’t want to acknowledge were technically insolvent. I still think we should have adopted the strategy used by Sweden. We would have been back to normal whatever normal is now without creating the enormous income and wealth inequality that Fed policies have bolstered.

2 comments… add one
  • Guarneri Link

    The point in the last paragraph we discussed a good 7-8 years ago. In addition, the Fed is on record as attempting to generate a wealth effect. I’d say both policies turned out to be boneheaded.

    I have on my desk here a crystal ball. It says 2.7%. Someone prove me wrong……………..

  • I’d say both policies turned out to be boneheaded.

    I think that’s what the record suggests.

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