(Editor's note: The economy and interest rates have become issue one for investors. Is growth slowing? Will the Fed do more? On Tuesday, James Galbraith wrote a column arguing against more Fed rate hikes, essentially saying that the Fed was being too quick on the trigger. James Padinha, the Invisible Mouth, responds with his own critique of Galbraith's column. Padinha's views, of course, are his alone.)
JACKSON HOLE, Wyo. -- Post no bills?
'Fraid not. Your narrator is happy to crowd that
religious door a little more.
(a) Is the economy growing too fast?
You gotta love it when the slowdown guys use real (or price-adjusted) numbers to support their arguments.
The only wee problem with doing so is that people do not make and spend real dollars. They make and spend nominal ones. Go ahead and take a hard look at your last pay stub. Is it adjusted for what one of the price indices did last quarter? Or does the wage number just appear in terms of plain old money? Funny. Mine, too.
gross domestic product (or GDP) has been strengthening for three straight quarters. Its year-on-year rate of increase accelerated from 5.3% during the second quarter of last year, to 5.7% during the third, to 6.3% during the fourth -- and then to 6.9% during the first quarter of this year. The final sales (or domestic demand) numbers are even more impressive: 6.6% in 2Q99, 7.3% in 3Q99, 7.7% in 4Q99, and 8.4% in 1Q00 (and note that the 8.4% went down as the strongest showing since the mid-1980s).
Simply put, growth is not slowing.
You also gotta love it when the slowdown guys ignore trend altogether when it isn't going their way. On a year-on-year basis, for example, real GDP -- the very thing the slows say shows slowdown -- has also been strengthening for three straight quarters. It accelerated from 3.8% during the second quarter of last year to 4.3% during the third to 4.6% during the fourth -- and then to 5% during the first quarter of this year.
Isn't it odd how that always fails to get mentioned?
You also gotta love the fact that the slowdown guys have no problem at all citing real GDP numbers that look "slower," owing to acceleration in the price indices -- the very acceleration the slows say does not exist. The January-February-March real GDP increase of 5.4% that the slows keep citing, for example, would have printed 6.1% had the GDP price index not risen more during the first quarter (2.7%) than it did during the fourth (2%). And yet it did. It most certainly did rise more.
Thought to slow self: The price measures are not accelerating, but it's OK that they are. 'Cause they make my slowdown argument look even more convincing.
Hey, that's a win-win.
(b) Is there incipient inflation today?
The GDP price index troughed at a 1% year-on-year rate during the fourth quarter of 1998; it is rising at a 1.8% rate now. The
consumer price index troughed at a 1.4% year-on-year rate in April 1998; it is rising at a 3% rate now. The
producer price index for core (excluding food and energy) intermediate goods -- the one pipeline price gauge central bankers follow more than any other -- troughed at a negative 1.8% year-on-year rate in February 1999; it is rising at a 3.3% rate now.
Inflation is defined as a sustained increase in the general price level over time. I would say the numbers would say we're past incipient.
(c) Why did inflation disappear?
It disappeared only in the eyes of those who think one monthly overall CPI print of nil is plenty of proof to pronounce the price problem dead.
For those of us who passed on the comfort of the embryonic sac to engage the challenges of navigating the real world?
And oil and productivity?
I was under the impression that money growth (which, oddly enough, accelerated in March and then again in April) fit into the inflation equation somewhere.
(d) Do we have extreme worker scarcity?
You gotta love it when the slows pick and choose (wage measures, in this case) to fit their needs.
Unit labor costs are indeed growing at year-on-year rates less than 1%.
Elsewhere? The wages and salaries portion of the employment cost index is growing at a 4% year-on-year rate (compare with a peak of 3% during the 1994 tightening cycle). The average hourly earnings series from the employment report is growing at a 4.2% year-on-year rate (compare with a peak of 3% during the 1994 tightening cycle).
The compensation series released alongside the productivity numbers are growing at rates between 4.3% (in the nonfarm business sector) to 4.9% (in the nonfinancial corporate sector). The compensation series released alongside the GDP numbers are growing at rates between 6.1% (on a nonfinancial-corporate-business basis) and 6.3% (on a national-income basis).
Meantime, the jobless rate continues to decline (it's fallen by about 0.4 of a percentage point per year over the last four years, with the decline being at least 0.3 of a percentage point each year), claims for unemployment insurance continue to hover at historic lows (which suggests that employers might be hoarding workers), and one of the biggest employment agencies in the country reports that its "survey results
that show that a record number of American businesses expect to seek additional hires during the third quarter, combined with a drop in the unemployment rate, indicates that the traditional labor supply is essentially exhausted."
Based on the numbers, it is impossible for anyone to assert that workers aren't quite scarce or that wages aren't rising faster than prices.
(e) Should we be concerned about the wealth effect?
There's that s-word again!! Maybe policymakers shouldn't be concerned about the wealth thing ... yet they are (We covered the attractiveness of normative economics in a recent
column). And all the carping in the country isn't going to change that.
To argue that the Fed shouldn't be doing something it is doing serves no practical purpose at all. And you gotta wonder why it is that some people spend their time doing only that. Is it because the useful alternative -- figuring the best course of action based on what the Fed
doing -- seems too daunting a task? Or is it because it introduces the possibility of failure?
As for margin, central bank literature shows that the Feds aren't going to up requirements because they think them -- rightly or wrongly -- a limp policy tool (This
piece sums the position as well as anything).
(f) Will rate hikes actually slow the economy to a sustainable pace?
(g) What would happen next, if the Fed didn't raise rates?
The Fed did not get lucky in 1994. Rather, for the first time ever, it acted as promptly and aggressively as economic and financial conditions told it to. It acted pre-emptively to prevent a real threat from becoming a serious problem (and this, despite violent objection and criticism from the market community, which was convinced that the Feds were hellbent on driving us into recession). It ended up slowing a torrid rate of growth to a sustainable one -- it ended up engineering the only perfect landing ever -- and it ended up keeping the price measures in check, and it ended up laying the foundation for the huge increase in share prices we've seen since.
All because it bit the bullet and acted quickly and forcefully enough.
An economy growing as quickly as ours this far along into the cycle has never upped and slowed all on its own. Ever. (The 1984-85 "self-slowing" episode our friend keeps referencing speaks nothing at all to what's going on now because the economy was just coming out of recession; GDP fell 2% in 1982. And, as an aside, I want to pose this question to our slowdown friends: What would have happened in 1994-95 if the Fed hadn't doubled the funds rate? Do you really believe that the economy's growth rate would have slowed by 2 full percentage points all on its own?) As such, to think that three years of above-trend growth will now tame itself, especially given how accommodative financial conditions still remain, is merely hopeful.
And yes, all expansions do end the same way: The Fed ends up killing them. Why is that, though? It is not, as our friend suggests, because the Fed finally steps in, out of anger or a dorm-mom complex, to kill a party to which it wasn't invited.
No, the key here is that the Fed is the very host of the party: It supplies the food and drink on which we all feast. The Fed pumps liquidity -- and therein lies the answer to why it ends up killing expansions: It ends up pumping too much for too long, and then almost always waits too long before it hits the reverse switch and begins sucking back up. And by the time it does start to act, the mess has gotten even worse, and so it has no choice but to get even meaner about cleaning it up.
It's funny that our friends do not complain about the Fed, while they're still rolling in fresh kegs. At times like that, our central bankers are getting it dead right.
But when it comes time to pay the porcelain piper? My, do the slows get grumpy.
And maybe it isn't the booze itself that's to blame for your hangover. Maybe you are. For choosing to drink too much of it?
And damn it if drinking responsibly just ain't much fun.
(h) Is it intellectually corrupt to oppose higher rates?
(j) Well, I'll take Kudlow if I have to.
In my mind, yes.
And you can have him.
(i) Forget Gore and the AFL-CIO.
This is what I wanna know: Where's Waldo?
We've found him.