Can A Modern Economy Generate Jeb Bush’s Real 4% GDP Growth? Yes, but not with tight money

A Benjamin Cole post

GOP presidential hopeful Jeb Bush has generated some blog-blabbing on his pronouncement that the U.S. GDP could and should grow at 4% real annually.

No doubt Bush has some good and some GOP ideas on how to get to 4% real growth, starting with cutting taxes on the rich and specific regulations disliked by GOP campaign contributors, although eliminating federal ethanol diktats or economically parasitical defense spending will never be mentioned.

But Bush has another, even larger hurdle than partisan impediments to clear on his race to 4%: The Federal Reserve Board.

Forgotten today is that the U.S. economy did expand by 20% in four years in recent history—the four years following the 1976 recession. Arthur “Print More Money” Burns was Fed Chief, and he thought U.S. inflation was baked into the cake, and so all he could do was promote growth. Burns got inflation too.


It is easy to dismiss Burns, but in fact he faced an economy far more inflation-prone than today. Unions were huge, international trade was small, banking was rate-regulated, transportation was rate-regulated, telecommunications was rate-regulated. Even stockbroker commissions were regulated. Big Steel, Big Autos, Big Aluminum, Big Labor defined the economy. USDA dictated crop prices. The minimum wage was higher than today in real terms, top marginal tax rates were at 90%, and there was no Internet and its price-searching or market-making.

So, when Burns stepped on the pedal, yes he pushed real growth north of 4% annually, but he did obtain double-digit inflation also.

But as the intervening years have shown repeatedly, today the U.S. economy is not inflation-prone. Indeed, the Fed can print up $4 trillion in QE, and still fall below its too-tight 2% PCE target—a target less than half the rate of inflation Volcker called low enough.

Jeb Bush: If you really want real 4% growth, think very, very carefully about who you appoint to the Federal Reserve Board. Monetary suffocation and 4% real GDP growth might happen, but it is doubtful.

The lack of imagination is pervasive!

Gavyn Davies summarizes:

The great financial crash of 2008 was expected to lead to a fundamental re-thinking of macro-economics, perhaps leading to a profound shift in the mainstream approach to fiscal, monetary and international policy. That is what happened after the 1929 crash and the Great Depression, though it was not until 1936 that the outline of the new orthodoxy appeared in the shape of Keynes’ General Theory. It was another decade or more before a simplified version of Keynes was routinely taught in American university economics classes. The wheels of intellectual change, though profound in retrospect, can grind fairly slowly.

Seven years after 2008 crash, there is relatively little sign of a major transformation in the mainstream macro-economic theory that is used, for example, by most central banks. The “DSGE” (mainly New Keynesian) framework remains the basic workhorse, even though it singularly failed to predict the crash. Economists have been busy adding a more realistic financial sector to the structure of the model [1], but labour and product markets, the heart of the productive economy, remain largely untouched.

What about macro-economic policy? Here major changes have already been implemented, notably in banking regulation, macro-prudential policy and most importantly the use of the central bank balance sheet as an independent instrument of monetary policy. In these areas, policy-makers have acted well in advance of macro-economic researchers, who have been struggling to catch up.

The IMF has tracked this process well, and it has just held its third post-2008 conference on Rethinking Macro Policy under the leadership of chief economist Olivier Blanchard. Olivier has summarised the conference (here and here) but so far it has it not been much discussed by macro investors.

I have therefore taken the liberty of organising Olivier’s summary and the conference material into the three tables below. Although highly simplified, the tables represent a snapshot of the current “state of the art” in macro policy, at least as seen by today’s mainstream luminaries of the subject.

And concludes:

In conclusion, what should we expect from macro-policy makers in future, assuming the economic back-drop remains relatively benign? Probably, more of the same: broadly stable central bank balance sheets, very slow declines in public debt ratios and a gradual return to using interest rates as the main weapon of monetary policy. A more rapid return to pre-2008 norms for fiscal and central bank balance sheets is somewhat unlikely.

To call the economic back-drop benign is a stretch; but while that remains the conventional thinking, Summer´s “Great Stagnation” thesis will continue to be ‘celebrated’!

Why can´t they see that the “GS” is the exact opposite of the “Great Inflation”? Interestingly, while the “GI” was going on, the prevalent thought was also that monetary policy couldn´t do much to abate it!

Jim Paulsen Of Well Capital Management Becomes Defeatist

A Benjamin Cole post

The supply side of the United States economy can only grow by 2% a year, and so the U.S. Federal Reserve and Wall Street are “making a big mistake” in assuming the domestic economy “cannot overheat,” said Jim Paulsen, chief investment strategist, Well Capital Management on May 21 to CNBC.

In fact, there is the threat “you’re going to aggravate costs, [and] push interest rate pressures,” Paulsen warned.

It is hard to know where to begin with Paulsen’s analysis.

Global Supply Lines

First, can Paulsen name a single industry that is supply-constrained, that is now rationing output by price? If so, I want Paulsen to name that industry, so I can buy a related ETF.

Paulsen also ignores that the U.S. supply side has globalized since the 1970s. If more steel, autos, computers or architectural services are demanded in the U.S., the supply side is international. Surely, Paulsen cannot believe there is not 2% more capacity in global supply lines (most of which are begging for business, btw)?


Unit labor costs in the U.S. are up 5.8% in the last eight years, and labor income as a fraction of business income declining in the U.S. for decades. Maybe this will change, but for now labor costs are nearly deflationary.

Interest rates?

The Economist magazine recently reported there is $12 trillion in cash sitting in U.S. banks and money market funds, earning nearly zero percent interest. And Bain & Co. is predicting capital gluts as far as the eye can see, at least for the rest of this decade. How do you get higher interest rates with capital gluts?

Housing-Maybe A Worry

People in expensive single-family detached neighborhoods do not like sky-rise condos with ground-floor retail erupting next door. In a nutshell, this explains why the U.S. may have housing inflation from time to time. Local housing markets may in fact be supply-constrained. Whether such local regulations lead to national inflation, or should determine central-bank monetary policy is an interesting question. Probably, the Fed just has to live with a little inflation from this quarter.


The main economic problem remains a lack of aggregate demand, in the United States, and globally. Not only that, it sometimes takes a round of inflation to stimulate supply—think oil markets, or even housing markets. The route to greater supply is paved by inflation. Life is not perfect, and that is another example thereof.

So, the Fed should print more money.

The Only U.S. Macroeconomics Graph You Need

A Benjamin Cole post

That the United States economy today is far less inflation-prone than the 1970s is hardly in dispute. But for some reason—ideology, or generational perhaps—we have now a Fed that is monomaniacally obsessed with inflation, and thus overly timid of promoting robust growth. Or even of trying.

B Cole_Only graph

Since the 1970s, we have seen international trade balloon in the U.S., with the attendant global supply lines. We have seen the destruction of Big Labor, Big Auto, Big Steel, Big Aluminum, big anything. Who has market power today?

Meanwhile, retailing has been transformed by the incredible global sourcing and efficient distribution of a Wal-Mart, Target or the ubiquitous dollar stores—not to mention now-robust informal retail markets courtesy of Craigslist and the Internet.

Moreover, since the 1970s whole industries, such as transportation or finance, have had price shackles thrown off. Remember regulated airline, train and trucking fares? How about fixed stockbroker commissions? Passbook rates?

Top federal marginal tax rates have been cut from 90% in the 1960s to under 40% today—capital is abundant, or even glutted. No good idea in business today goes unfunded. This is different from a couple decades back, when many complained that one “had to have connections” to get bank or VC funding.


The proof is in the pudding. The last time the U.S. saw double-digit inflation was in the 1980s, and early at that. The last time the U.S. had a reported annual CPI rate above even briefly above 5% was…twenty-five years ago.

Today, if there is demand for something in the U.S—cars, say—it is not only the Big 3 who answer the call. It is Honda, Toyota, Mazda, Nissan, Hyundai, Kia, Volkswagen, BMW, a few others and what is left of the Big 3, those being GM, Ford and Fiat-Chrysler.

The Upshot

The Fed and the inflation-fixated are fighting the last war. The game now is to keep demand growing and robust. Prices will take care of themselves. That is called competition, and we have never had so much competition before in the U.S.

Print more money.

Thinking About The Unthinkable: On Nuking Unemployment

A Benjamin Cole post

In 1962, Herman Kahn, the American author of On Thermonuclear War, followed up with his tome Thinking About The Unthinkable, about a nuclear war with the Soviet Union.

Some were appalled at Kahn’s parsing the life after coast-to-coast atomic blasts.

But today’s macroeconomists would be equally aghast at the suggestion the United States should seek zero unemployment.

But should they be?


Cross-country economic comparisons are notably treacherous due to differences in the definitions and quality of data compilation.

Yet Thailand has had just about no unemployment for years, and modest inflation rates. For example, the latest issue of The Economist reports Thailand has an unemployment rate of 1% and a deflation rate of 1%. Thailand’s latest quarter reported annual growth rate 7.1%, and 3.9% YOY. I can tell you that in rural Thailand work goes undone for lack of laborers.

My anecdotal take is this employment picture is great for the Thais. Almost any Thai has a sense of value, a sense the economy works for them, if they work.

Thailand, run by populists, royalists and now a junta is able to do better than the United States?

Is this creditable?

The Phillips Phlat-Line

Is the U.S. so different? We have seen since the 1990s in the U.S. that inflation barely budges, even as unemployment drops. The Phillips Curve is dead. Indeed, the U.S. has had steady drops in the reported national unemployment rate since 2008, and the problem is still potential deflation, not inflation. The latest PPI, of course, was down YOY.

B Cole_Unthinkable

Thinking The Unthinkable

Surely, some structural impediments could be removed in the U.S. economy, such as the overly generous Social Security and Veterans Administration disability programs, upon which 12 million Americans now draw monthly checks—in a nation in which most jobs do not involve physical labor. Extending unemployment insurance is a bad idea too. Even the minimum wage is a bad idea—although I am uneasy about suffocating the economy through tight money and then stomping the minimum wage, though some might take malicious glee in that, and have proposed as much.


Would it be such a bad thing for our macroeconomic policy to target much lower rates of unemployment?

Why not try, and see what happens?

If moderate inflation results, could we live with it? Why not? The U.S. prospered for decades with inflation in the 3% range. If in the worst cast scenario, inflation rose too high, and the Fed hit the brakes a little—how bad would that be?

When did sub-2% inflation take precedence over robust growth?

Important advice from Eichengreen

The economics profession was arguably the first casualty of the 2008-2009 global financial crisis. After all, its practitioners failed to anticipate the calamity, and many appeared unable to say anything useful when the time came to formulate a response. But, as with the global economy, there is reason to hope that the discipline is on the mend.


These developments amount to a sea change in economics. As recently as a couple of decades ago, empirical analysis was informed by relatively small and limited data sets. To be sure, analytical frameworks are still needed to help make sense of the data. But now there is reason to hope that, in the future, economists’ conclusions and policy advice will be shaped not by those frameworks’ elegance, but by their ability to fit the facts.

The politically correct term for depression: “new normal of slow growth”

That´s the takeaway from Matt Obrien´s “The recovery is stalling out again. Is the economy actually in … a recession?

It’s only mostly crazy. And even then, it depends on what you mean by “recession.” If you’re talking about the usual rule-of-thumb of two consecutive quarters of negative growth, then, yes, there’s probably a 5 percent chance that we’ve fallen into one. But if you mean an economic decline that actually makes unemployment go up, then, no, we don’t have to worry about the r-word.

We just have to worry about a new normal of slow growth that might dip into negative territory every now and then even during the good times. In other words, about turning Japanese.

New normal indeed! SF Fed president John Williams, for one, is “happy”:

 “I am very optimistic as to where the economy is going over the next couple of years,” Mr. Williams said. “We’ve gotten the national economy back to basically full strength,” he said, adding what is now a 5.5% jobless rate will likely move to 5% by year’s end.

How fast we have adapted!

Politically Correct Term for Depression

A Challenge For Supply-Siders: Name the Industry To Invest In For Next Five Years Answer: Print More Money, And Maybe I Can Tell You

A Benjamin Cole post

The secular stagnation arguments in many ways boil down to a supply-side vs. demand-side joust.

For now, I am on the demand-side: Print more money.

Why? Name for me the industry that is supply-constrained, that needs lower taxes, regulations or more capital to expand to meet unmet demand.

When we look at autos, computers, energy, clothing, commercial real estate, we see again and again glutted supply.

Name a single automaker you would invest in confidently for the next five years—and I believe Ford is a very sharp outfit. Trouble is, there are more auto factories than the globe needs.

If there is an industry that will be supply-constrained in the next five years, I want to know about it. Seriously! I will happily invest in an ETF that mirrors that industry.

For a fleeting few years, it appeared the commodities were supply-constrained. Now, glutted. By the trillions of dollars money has flowed into energy sectors, financing every good, many so-so, and a lot of dubious ventures. There is no shortage of capital in the energy sector, or other commodities. I see gluts for a long, long time in most commodities. Even ethanol is glutted.

A possible exception to the glut rule is residential real estate in limited geographic areas. As widely noted, the most ardent right-winger becomes an anti-growth, anti-capitalist NIMBY-king in their own neck of the woods.

While commercial real estate markets tend to become glutted anyway, residential markets may be supply constrained. Thus we see West Los Angeles homes and Manhattan condos selling for centi-millions.

The solution to tight residential markets is on the supply-side, but also impossible to implement nationally. Every local government in the United States is beholden to (often wealthy and powerful) homeowner groups.

Yes, any successful economy must invest in infrastructure, plant and equipment, education, and promote work ethics and contractual honesty. These are basics, and we all salute.

But when a global economy appears chronically over-supplied with everything…then the problem is on the  demand side.

As I always say, print more money.

Is This a Good Social Contract?

A Benjamin Cole post

My libertarian friends bridle at the idea that there is a social contract that binds citizens together, however loosely.

My libertarian friends all have IQs of 140 and above, I suspect. They can survive and even prosper in a monetarily suffocated, slow-growth economy entangled in taxes and regulations.

To be fair, my libertarian friends do call for fewer regulations and taxes of the type they do not like. But they do stop there.

So I ask, “Is the following good public policy?”

  1. Asphyxiate the economy through years of central bank tight-money policies.
  2. All but universally outlaw pushcart vending and sidewalk retailing, home restaurants, front-yard businesses, informal speakeasies, prostitution, and almost any other business an ordinary citizen can start.
  3. Bash the minimum wage.


You don’t have to live long in SE Asia before you  find that pushcart vendors and sidewalk retailers are common, and accepted. Anyone with a $50 load of fruit or large vat of soup to sell can try their luck on city streets. There is a minimum wage in Thailand, but so low as to be meaningless—and besides, anyone can go into business for themselves at any time. In large parts of SE Asia, the wage has to be higher than an employee can make self-employed.

But in the United States, it is virtually impossible to be a sidewalk vendor, and difficult even to be a food-truck operator (and those trucks are not cheap, btw).


Sadly, the minimum wage still does not help average people much, as it perhaps prevents the market from clearing off unemployment.

But relentlessly tight money has probably hurt working people more than any other policy of the last 30 years.

Unfortunately, routinely outlawed sidewalk vending is the province of state and local governments—and what landlord wants sidewalk vending in front of his commercial retail building? Ain’t going to happen in the U.S. Federal intervention on behalf of commercial freedom seems unlikely. The GOP is mute, and the Donks don’t care.

So, I see no practical solution to this unfair set of social contracts that in fact exist, whether my libertarian friends want to recognize those contracts or not.

But the next time you hear someone pompously pontificating about the perils of the minimum wage and the glories of free association and free markets—ask them, “Should not pushcart vending be legal?”

And why is the U.S. Federal Reserve suffocating the economy?

Who benefits from tight-money, no minimum wage, and the barring of millions from starting their own businesses?