The current state of the U.S. and global economies is unclear. Wherever you look, the data and trends suggest uncertainty.
Will the Federal Reserve raise interest rates next month? Will economic growth ever again exceed 2 percent? Is the stock market overvalued and on the verge of another major dip? Who is right about Europe: the Germans, who want more austerity, or Paul Krugman who wants more deficit spending? Can you trust China's economic numbers?
On a good day, I can read five major newspapers and still have important, unanswered questions -- questions that may, in fact, require deeper analysis than journalists can provide in limited space. So here are three troublesome questions that I have been pondering for months. Perhaps economists at the Brookings Institution, the Council on Foreign Relations, or the Peter G. Peterson Institute for International Economics can offer some clear answers. Or, if not, these organizations could provide a public service by sponsoring a joint conference to explore the answers.
- Why is economic growth in the U.S. so low? Presidents George W. Bush and Barack Obama signed major fiscal-policy stimulus programs. Incentive programs for first-time home buyers and a "cash for clunkers" automobile program were intended to combat the Great Recession, and the Federal Reserve grew its balance sheet to more than four trillion through three rounds of Quantitative Easing. We have experienced nearly 90 months of zero or near-zero interest rates. With all of these stimulus initiatives, why isn't the U.S. economy growing at more than three percent annually? Is growth stymied by too much regulation or too much debt being held by individuals, companies, and the federal government? Federal debt, by the way, is rapidly approaching 20 trillion.
- What are the long-term structural implications of negative interest rates? As mentioned, we have experienced nearly 90 months of ZIRP -- zero interest rate policy by the Federal Reserve. Factor in relatively low inflation and real interest rates have occasionally dipped below zero. This situation is unprecedented. Money is an asset -- an especially important asset since it also represents a store of value. How can money be priced at zero -- or below -- for extended periods of time? Could negative interest rate policy -- NIRP -- follow ZIRP in the US? Already, nearly a quarter of the world economy (Denmark, Sweden, Japan, and the entire European Union) has negative interest rates. This continued price distortion not only creates asset misallocations more broadly, but it also means that central banks lack ammunition should a future recession arise. That's why some analysts urge the Fed to raise rates now in order to have room to lower them again when a recession arrives.
- Is former Office of Management and Budget Director David Stockman wrong in predicting an imminent economic collapse far greater than the Great Recession? (Full disclosure: I worked at Stockman's OMB in the early Reagan years.) His numbers are sound and scary. He points to: declining corporate earnings, rising inventories, stock valuations in "nose-bleed" territory, transport overcapacity, slippage in Japanese trade accounts and German exports, the oil patch depression, Brazil, and the Chinese economy which he calls a giant Red Ponzi Scheme. Are the financial markets and their chorus of true believers conning us again?
I am a recovering lawyer who pretended to be an economist during the 15 years I ran an economic think tank in Washington, DC. (I studied economics in graduate school and probably know just enough to be a bit dangerous in this area). What I do know is that lawyers are skilled at asking questions, while economists are famous for avoiding answers. Economists are frequently teased for their propensity to analyze issues by saying "on the one hand this, but on the other hand that." Wits will occasionally ask if a one-handed economist has ever existed.
We are at a moment when we may need that one-handed economist -- or at least greater certainty when it comes to understanding the economic forces now at play throughout the world. The presidential candidates should explain their views about the current economic climate and their solutions to our growth-related problems. In 2007 and 2008, there were a few "squeaky wheels" who saw the collapse coming and were mostly ignored. Arguing that "this time is different" will not suffice. Something is clearly amiss, and not enough attention is being paid to today's indicators.
I hope that David Stockman is wrong, but his numbers and analysis go without rebuttal from the mainstream economics community. At a recent Brookings Institution conference on Strengthening the Safety Net to Mitigate the Effect of Future Recessions, a prominent economist suggested that there was no "natural limit" on Quantitative Easing and that interest rates in the United States conceivably could be lowered to minus 40 basis points (as in Europe) but could probably not drop below minus 75 basis points.
There is a limit to Quantitative Easing; we just don't know it in advance, but it will arrive when there is a loss of confidence in our economic leadership or when the Fed's balance sheet becomes too big. As for the negative bound, who would have predicted two years ago that rates in the Eurozone would be below zero?
Some observers contend that fiscal policy and monetary policy have reached their limits. Significant increases in deficit spending are unlikely politically, and monetary policy is at the point often called "pushing on a string." Try telling average Americans, who learned early on that saving was a good thing, that they might now have to pay their banks for storing their precious savings. They aren't stupid: they'll move into cash.
Candidates Clinton, Sanders, and Trump, what do you and your economic advisers think? We need to know now.
Charles Kolb served as Deputy Assistant to the President for Domestic Policy from 1990-1992 in the George H.W. Bush White House. He was president of the French-American Foundation - United States from 2012-2014 and president of the Committee for Economic Development from 1997-2012.