"Kee" Points with Jim Kee, PhD.

Just about every year I attend the American Economic Association’s (AEA) Annual meeting, and I take notes on presentations and panels that I think would be of interest to Kee Points readers. I just returned from this year’s meeting in Chicago, and what follows are a few of what I felt were some of the more provocative insights.


On this year’s outlook for the US economy: Academic economists, like most academics, tend to be a little left of center. This year there was a marked upbeat in the US economic outlook, albeit for different reasons. Economists on the left were upbeat because consumer leverage (debt relative to income and assets) had come down dramatically since the crisis and could fuel consumer spending (that case could have been made last year or the year before, however). They were also upbeat that government spending was slated to tick up after being flat(ish) for several years.


On the right: Economists working on/with the Trump transition team (e.g. Kenneth W. Griffith) mentioned the sole focus on economic growth, primarily through deregulation and tax cuts and a particular focus on reducing regulatory compliance costs across industries. An example given was the fact that for most corporate boards, regulatory compliance is the number one issue (rather than profitability and growth). Raghuram Rajan (former head of India’s Central Bank) pointed out that the mere replacement of zealous regulatory personnel with more hands-off regulatory personnel would positively impact growth even with zero actual regulatory changes. This all represented a decided change in tone from prior AEA Annual meetings. Many derided the “transparency drive”, which has resulted in things like 200 page mortgages that nobody reads. A summary would be that the positive view going forward from the right stems from a regulatory environment that encourages risk taking over risk avoidance. Rajan in particular highlighted the lack of business investment spending that has been caused by policy uncertainty, and the misplaced effort to stimulate it over the past few years by focusing on the cost of capital (interest rates), which he added, “has been about as low as you can get”.


Healthcare spending was widely seen as a big unknown: It was universally recognized among speakers that increases in healthcare costs had driven out a lot of private sector spending in other areas, but most economists felt that healthcare going forward was a big Trump administration wildcard. They also felt that actual tax cuts would fall short of promised tax cuts, largely because of budget realities. And they felt that government infrastructure spending would be less than promised for the same (budget) reason.


Central bank policies: Most felt that a “normalization” of interest rates, loosely interpreted as not trying to keep rates lower than they otherwise would be, was the appropriate thing to do. The narrative was that the Fed (and other central banks) responded decisively during the financial crisis, and that made all of the difference. But they stepped beyond the bounds of prudent policies with the various “unconventional monetary policies” (QE, LTROs, etc.), which has increased uncertainty. The price to pay for normalization is a stronger currency, which the US is now experiencing. It was asserted that the move towards negative rates in several countries suggested a bit of panic and so was regarded by all (that I heard anyway) as a big policy mistake both in Europe and in Japan.


Fed policy going forward: One of the governors of the Federal Reserve, Jerome Powell, pointed out that the Fed’s “dot plot”, which indicates where each Federal Open Market Committee member believes the federal funds rate will be over the next three years, was intended to convey how much uncertainty there really is regarding future rates. “The truth is, no one knows,” said Powell, and that is coming from a Fed Governor! Powell also pointed out that systemically important financial institutions (SIFIs) are much stronger and better capitalized (i.e. better able to withstand a big shock) than they were prior to the crisis, and this was in part due to central bank policies.


By the way, it was asserted that the world isn’t really more focused on the Fed than it used to be. An example (I think this came out of a recent Alan Greenspan biography) was that people used to watch which hand former Fed Chairman Alan Greenspan carried his briefcase in during FOMC meeting days, and that would indicate whether he was more inclined to raise or lower rates!


Brexit: These sessions were interesting, with former IMF chief economist Olivier Blanchard admitting that he and many others felt that the Brexit vote would be THE economic event of 2016 and that investment spending in the UK and Europe would sharply decline (I did too), which proved to be wrong. Some felt that the key issue wouldn’t be UK Prime Minister Theresa May’s invoking of Article 50 (to formerly exit the EU), but rather the EU’s response, which could be messy and punitive. Others disagreed, arguing that the EU will actually have an easier task of governing without the UK, and that it is neither in theirs nor in the UK’s interest to play hardball and reduce reciprocal access to each other’s markets. Research showed that the “leave” voters weren’t expecting economic gains but rather wanted freedom from Brussels bureaucrats (the de facto capital of the European Union is in Brussels, Belgium), and they expected the economic costs to be small. Noted ‘leave’ supporter Andrew Lilico of Europe Economics argued that most models showing big economic losses for the UK fail to consider the possibility of better regulation and less bureaucratic trade deals. And he pointed out ­that there is no anti-trade sentiment in the UK, just anti-Brussels.


The least exciting: In the end, I would say that the regions for which there was the least amount of enthusiasm were Japan and China, and by extension from China because of their close relationships, emerging markets. Reasons cited were a lack of sufficient structural reforms in Japan (Abe’s third arrow) and the slowdown in productivity growth (output per unit of input) in China. The fact that China is now divided into fast and slow growing regions (rather than all fast) makes it harder for top-down (government) policies to stimulate growth. In fact, one panelist cited even the Organization for Economic Cooperation and Development (OECD) as saying that Europe too has failed to address its key problems, namely “horrible labor and business regulations”. That kind of takes us full circle back to the US and the potential regulatory reform that is driving much of the relatively upbeat US economic outlook.