Worthwhile Reads – Link Round-up for June 27th

On a government policy, James Pethokoukis covers US Treasury Secretary Jack Lew’s speech to the Economic Club of New York and the realization that low growth may be a new normal unless something is done to get back to the old growth trends:

“US Treasury Secretary Jack Lew said the US GDP growth rate, adjusted for inflation, is now projected to run a little above 2% a year. That would be a significant downshift from the 3.4% average growth rate from the end of World War II until 2007.

Look at it this way: If the US economy grows at its traditional rate between now and 2040, it would double in size to $37 trillion vs. just 50% growth to $27 trillion at the slower pace. And remember, that growth gap — $10 trillion in 2040 – is cumulative. It would persist year after year and get larger as time passes.”

With the election of the new majority leader in the House, Rep. Kevin McCarthy, and the expiration of the Export-Import Bank (Ex-Im Bank) charter in September a fight is growing on whether the bank should still exist. The US has struggled to stay competitive in manufacturing and the Ex-Im Bank helps keep manufacturing jobs in the US by backing loans to foreign buyers of US products. Rep. Chris Collins (R-NY) states in an article for USA Today that,

“Those opposed to Ex-Im reauthorization are fighting for an ideal system the international market will not accept. I wish we lived in a world that was always fair and treated everyone equally. But the reality is we do not.

Reauthorizing the Ex-Im Bank boils down to a very simple proposition for Washington policymakers. For once, they can stop simply talking about creating jobs, and do something that actually creates jobs.”

On the Fed front, Vox highlights the weak response of the Federal Reserve to new economic projections after the weak first quarter of this year.

“FOMC members aren’t just passive bystanders; they collectively control one of the most powerful levers of economic policy. If they wanted to, they could inject more money into the American economy to offset the expected economic slowdown. By forecasting a slowdown, and refusing to announce any policy change to compensate for it, the FOMC is effectively announcing that they’re happy with the slower growth they anticipate.

This stance might be understandable if the FOMC believed that surging inflation was imminent. Sometimes you have to accept slower growth to keep inflation in check. But the FOMC members don’t believe that. They’re forecasting that inflation will stay at or below 2 percent in 2014, 2015, and 2016.”

The Fed seems comfortable with the slower growth and not trying to make up the output lost due to the Great Recession.

Ryan Cooper piles on with his view that the QE taper was premature and should be reversed. He states that:

“Since late last year, the Fed has been “tapering,” i.e. slowly ending, its open-ended program. In the context of six years of mass unemployment, an economy that is well below capacity, and an output gap that might be trillions deep, a sharply negative quarter of GDP is strong evidence that the taper was way too premature. This report might just be bad enough to shock them into reversing course.

He continues with the opinion that the current position of the Fed is based on ideology and political pressure:

“I suspect the Fed’s current quagmire is also partly the outcome of the current balance of ideology and political pressure there, which means that it’s also possible that Fed board members are making errors of reasoning and might be convinced to change their views. (Hey, it happened to the once-hawkish head of the Minneapolis Fed, Naryana Kocherlakota.)”

Finally, Greg Ip attacks the idea that inflation is a big risk to the economy:

“I find the panic over inflation perplexing…. Factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February…. What should we infer from this? Nothing…. Theoretical. If you have a forecast of higher inflation, it helps to have a theory of the inflation determination process…. Many critics think the prolonged period of low real rates and the large size of the Fed’s balance sheet are in and of themselves inflationary, but this is divorced from any consideration for why real rates are negative and the Fed’s balance sheet so large in the first place. Charlie Evans, president of the Federal Reserve Bank of Chicago, calls this ‘the spontaneous combustion theory of inflation… Households and businesses simply wake up one day and expect higher inflation is coming without any further improvement in economic fundamentals’…. Strategic…. Hoover Institution… scholars were deeply concerned…. Many cited the 1970s…. What these analyses ignore is the asymmetry of risks…. The Fed… knows how to get inflation back down…. By contrast, recent history shows how few effective tools central banks have for reversing inflation that falls too far…

Italics mine. This is a very important point.

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