{"id":578,"date":"2014-01-14T17:06:07","date_gmt":"2014-01-14T17:06:07","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=578"},"modified":"2014-01-14T17:06:07","modified_gmt":"2014-01-14T17:06:07","slug":"larrys-secular-stagnation-excuse","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=578","title":{"rendered":"Larry\u2019s \u201cSecular Stagnation\u201d Excuse"},"content":{"rendered":"<p>Larry Summers disclosed his latest macro insights at an IMF Meeting last November, which he elaborated upon in a <b>Financial Times<\/b> article:\u00a0 \u201cWe may . . . be in a period of \u2018secular stagnation\u2019 in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low interest rates.\u201d\u00a0 In other words, we will continue to have weak GDP growth and high unemployment despite a zero Fed funds rate and low bond yields.\u00a0 This stagnation, he now claims, has been evident since 2000, which is why even the 2003-2007 housing bubble was not enough to spark rapid economic growth. (No word on why he failed to notice the secular stagnation of 2003-2007 until 2014.) \u00a0Summers identifies three possible ways to escape \u201csecular stagnation.\u201d<\/p>\n<ul>\n<li><b>Supply side reforms<\/b> such as improving labor force skills, increasing companies\u2019 capacity for innovation, structural tax reform, etc.\u00a0 But this he dismisses on the grounds it will take too long.<\/li>\n<li><b>Super low interest rates<\/b>.\u00a0 He rightly says we are already doing this but it isn\u2019t working, and besides we can\u2019t continue it forever without causing bubbles in asset prices.<\/li>\n<li><b>Aggressive Government Spending<\/b>.\u00a0 \u201cThe third approach\u2014and the one that holds most promise\u2014is a commitment to raising the level of demand at any given level of interest rates, through policies that restore a situation where reasonable growth and reasonable interest rates can coincide.\u00a0 This means <i>ending the disastrous trend towards ever less government spending and employment each year \u2013 and taking advantage of the current period of economic slack to renew and build up our infrastructure.<\/i>\u201d (Emphasis mine)<\/li>\n<\/ul>\n<p><b>Secular Excuse<\/b><\/p>\n<p>No offence, Larry, but it looks to me like you are concocting a phony, after-the-fact secular excuse for the spectacular failure of President Obama\u2019s economic policies. \u00a0Come to think of it, those were <b><i>your<\/i><\/b> economic policies, because you were Obama\u2019s Senior Economic Advisor.\u00a0 The failure of your policies is not a surprise.\u00a0 Back in 2009 I wrote that we would have yet another \u201cjobless recovery\u201d that would be even worse than the prior two because of Obama\u2019s anti-capitalist policies.\u00a0 And so it has come to pass; the employment population ratio is far below the level of the Bush administration and has not improved at all since the depths of the 2009 recession.<\/p>\n<p>Larry\u2019s simplistic model has just three variables \u2013 \u201csupply side reforms,\u201d monetary policy, and fiscal policy.\u00a0 What\u2019s weird is that most Wall Street economists, who are paid to be right and twist in the wind when they are wrong, accept this model and ignore the structural impact of Obamanomics\u2014which is why most of them have been too bullish on growth for the past few years.\u00a0 On \u201cBloomberg Surveillance with Tom Keene,\u201d you can hear well-paid, erudite PhD\u2019s go on for hours about the U.S. economy without ever mentioning structural issues such as Obamacare.\u00a0 Tom should remind them it was \u201cstructural reforms\u201d in Germany\u2019s labor market, 2003-05 ,that revived the putative \u201csick man of Europe.\u201d \u00a0Structural reforms, including deregulation and supply-side tax cuts, likewise rescued the U.S. from 1970s \u201cstagflation.\u201d\u00a0 It\u2019s not all about fiscal and monetary policy, Larry.<\/p>\n<p><b>\u201cStagnation\u201d Solution: Un-do Obamanomics<\/b><\/p>\n<p>Forget secular stagnation. The path to growth is obvious: \u00a0Reverse Obama\u2019s many anti-capitalist sins of commission and omission, which have collectively killed \u201canimal spirits\u201d and hiring in the private sector. To name a few:<\/p>\n<ul>\n<li>Obama\u2019s <b>rhetorical attacks and tax hikes on \u201cmillionaires and billionaires\u201d<\/b> have convinced job creators (including the CEOs of MMM, INTC, ETN, WYNN, L, JPM &amp; EMR) that the U.S. is a bad place to invest.<\/li>\n<li>As political comedian Mark Steyn noted, <b>the $823 billion \u201cstimulus\u201d package<\/b> managed to do the seemingly impossible\u2014spend immense sums on \u201cinfrastructure\u201d without building a single major improvement that anyone can point to.\u00a0 Money was wasted on weaning America off fossil fuels just as the fracking revolution was cutting energy costs and CO2 emissions.<\/li>\n<li><b>The EPA<\/b> attacked the energy and utility industries, among many others.<\/li>\n<li><b>Dodd Frank<\/b> enveloped the banking system in miles of red tape that discourage banks, especially community banks, from lending to small businesses.<\/li>\n<li><b>Attacking JPM with huge fines, <\/b>including\u2014most ludicrously\u2014fines for failure to detect the Madoff fraud when the SEC failed to do so despite explicit, detailed warnings from Harry Markopolos, which were the subject of a Barron\u2019s article.<b>\u00a0 <\/b><\/li>\n<li><b>Obamacare raises labor costs<\/b> for small and medium-sized businesses and creates strong incentives to stay small (under 50 workers) and use part-time workers (under 30 hours per week.)\u00a0 Companies have spent millions of hours coping with unnecessary disruption of their healthcare benefits.\u00a0 No wonder they\u2019re not hiring.<\/li>\n<li>Failure to OK the <b>Keystone XL Pipeline<\/b>.<\/li>\n<li><b>Failure to reform the U.S. tax code<\/b>, not even the ludicrously uncompetitive corporate tax regime.\u00a0 This keeps $1-2 trillion of corporate cash stranded off-shore.<\/li>\n<li><b>Failure to reform immigration<\/b>, which would increase entry of much-needed high skilled and low skilled workers.<\/li>\n<\/ul>\n<p><b>Killing Factory Jobs and Hurting the Poor\u00a0in India<\/b><\/p>\n<p>Much as Larry\u2019s lousy policies have hurt America\u2019s poor, over-regulation has stunted growth in India.\u00a0 I know little about India but have always wondered why its economy is so weak even though the country produces thousands of immensely talented emigrants who have made huge contributions to the U.S. economy.\u00a0 So, with few preconceptions, I read two books with contrasting perspectives on the topic that were featured in <b><i>The New York Review of Books<\/i><\/b>.<\/p>\n<p><b>Sen\u2019s Sins<\/b><\/p>\n<p><b>An Uncertain Glory: India and Its Contradictions<\/b>, by Jean Dreze and Nobel Prize winner Amartya Sen, discusses Indian economic growth and \u201cargues that the country\u2019s main problems lie in the lack of attention paid to the essential needs of the people.\u201d\u00a0 In prose that I found to be weirdly windy, gauzy, elliptical, garbled, turgid, convoluted, complicated, tortuous, abstract, and repetitively convoluted and complicated Dreze and Sen claim the state needs to intervene in markets if economic growth is going to help the common man and woman.\u00a0 A couple of excerpts:<\/p>\n<p>Those who dream about India becoming an economic superpower, even with its huge proportion of undernourished children, lack of systematic health care, extremely deficient school education, and half the homes without toilets . . . . have to reconsider not only the reach of their understanding of the mutual relationship between growth and development, but also their appreciation of the demands of social justice, which is integrally linked with the expansion of human freedoms.<\/p>\n<p>The case for going beyond private profit calculations in making economic decisions is strong, particularly in a country like India.\u00a0 The existence of what economists call externalities \u2013 like the pollution of air or water, or denuding of natural resources\u2014tends everywhere to drive a wedge between private gains and social benefits\u2026.A further reason for avoiding complete reliance on private-sector allocations is poverty and inequality.\u00a0 Since profitability is conditional on the ability of the purchaser, or the consumer, to pay, private profits can often be a very inadequate guide to the priorities of public need.\u00a0 Some of these problems can be dealt with by instituting appropriate taxes and subsidies\u2026.<\/p>\n<p>Left unsaid by Dreze and Sen is that India has long followed a socialistic approach to economic development, with politicians and intellectuals wringing their hands about inequality while a corrupt, inefficient bureaucracy does much to keep the poor poor by mismanaging large parts of the economy.\u00a0 The electricity grid, for example.\u00a0 Blackouts are very common; one in 2012 plunged half of India into the dark.\u00a0 Yet even though they admit \u201clack of responsibility seems to run through all the layers of hierarchy,\u201d Sen and Dreze oppose privatizing electricity for reasons that remain obscure.\u00a0 They opine, \u201cThe bankruptcy of the power sector in India is part of a general political problem that has to be addressed at an overall level and involves the need to resist (or counter) the political influence of privileged pressure groups.\u201d\u00a0 Whatever that means.<\/p>\n<p><b>How Regulation Kills Factory Jobs in India<\/b><\/p>\n<p>In <b>Why Growth Matters<\/b>, Jagdish Bhagwati and Arvind Panagariya offer a point-by-point rebuttal to India\u2019s socialistic approach to development. It turns out that excessive regulation, very reminiscent of Obamacare, <b>creates strong incentives for small firms to stay small\u2014which is a major reason why India has failed to develop labor-intensive manufacturing industries such as apparel and footwear,<\/b> which require large firms that can achieve economies of scale to compete with giant factories in China, Vietnam, Cambodia, Thailand, etc.\u00a0 Bhagwati and Panagariya tick off the many penalties and burdens that India\u2019s oh-so-moral social planners heaped on firms that made the mistake of hiring too many poor people:<\/p>\n<ul>\n<li>For manufacturing units with 10 workers using power and with 20 workers not using power, the 1948 Factories Act:\n<ul>\n<li>Limits worker hours to 48 per week;<\/li>\n<li>Limits work without a day of rest to 10;<\/li>\n<li>Requires a paid holiday for each 20 days of work;<\/li>\n<li>Prohibits employing children under 15 years of age;<\/li>\n<li>Bans employing women for more than 9 hours per day;<\/li>\n<li>Factory premises must be kept clean, with whitewashing every 14 months and repainting every 5 years;<\/li>\n<li>Separate washrooms for men and women;<\/li>\n<li>Uninterrupted supply of drinking water;<\/li>\n<li>Factories with 150 workers must provide lunchrooms.<\/li>\n<li>At 250 workers factories must provide a canteen.<\/li>\n<li>If the firm employs 30 women or more, a day-care center must be provided.<\/li>\n<li>The 1952 Employees Provident Fund and Miscellaneous Provisions Act requires three types of benefits:\n<ul>\n<li>a contributory provident fund,<\/li>\n<li>pension benefits to the employees and their family members,<\/li>\n<li>insurance for sickness, maternity benefits, etc.<\/li>\n<li>The list of burdens on employers goes on and on.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>These requirements are costly and require extensive paperwork, and they create plenty of opportunity for official corruption. So the good news is that Indian laws require factories that, on paper, are great places to work.\u00a0 The bad news is, there aren\u2019t many factories, and Amataya Sen has to dream up excuses for why India lags far behind China in reducing poverty and improving the lives of ordinary workers\u2014even though India had a thirty year head start in building a modern capitalist economy.\u00a0 And back here in the U.S., Larry Summers is confecting the excuse of \u201csecular stagnation\u201d in a pathetic attempt to explain away the failure of Obamanomics, which he helped to design.<\/p>\n<p>Copyright 2014 Thomas Doerflinger.\u00a0 All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Larry Summers disclosed his latest macro insights at an IMF Meeting last November, which he elaborated upon in a Financial Times article:\u00a0 \u201cWe may . . . be in a period of \u2018secular stagnation\u2019 in which sluggish growth and output, &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=578\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[247,248,155,79,249,245,246],"class_list":["post-578","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-amartya-sen","tag-jagdish-bhagwati","tag-larry-summers","tag-obamanomics","tag-poverty-in-india","tag-secular-stagnation","tag-structural-economic-reform"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/578","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=578"}],"version-history":[{"count":2,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/578\/revisions"}],"predecessor-version":[{"id":580,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/578\/revisions\/580"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=578"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=578"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=578"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}