Growth issues
So, what’s wrong? Why can’t the U.S. and world economies grow faster? Each year since the recession ended in 2009, at least six major economies have been in recession. There are two issues here: the first is demographics, and the second is the poor sets of economic policies now in place in the world’s major economies.
Demographics
In the 70s, 80s, and 90s, women began entering the workforce and provided the second income that gave consumption a hefty boost. But that trend has ended and has now reversed. We now have a huge segment of the population that is aging (the baby boomers) and the growth rate of the working age population (ages 20 to 64) is 0.5 percent, less than half of its growth rate in the 70s, 80s, and 90s. In addition, student debt has risen from about $10,000 per graduating student in ’07 to nearly $100,000 for today’s graduates. Delinquency rates on these student loans are now around 8 percent, so this portion of the population won’t soon be qualifying for a mortgage or adding heft to the consumption numbers.
Falling marginal propensity to consume
We know that much of the nation’s wealth is concentrated in the hands of those at or near retirement. Just think about the long period of zero-percent interest rates we have had (eight years), and the prospect that it will continue for the foreseeable future. Those at or near retirement must now worry about making their wealth last for the rest of their prospectively longer lives. The fact is, the marginal propensity to consume (MPC) falls at retirement. But now we have the added concern that with very low levels of asset return (zero-percent interest rates), there is even greater reason to limit consumption. In addition, 50 percent of those 55 years and older admit that they have not saved enough for retirement, so this segment, too, is likely to lower their MPC. All of this appears to be showing up in slowing consumption growth and a rising savings rate. Traditionally, we have seen robust consumption growth accompany a strong labor market. But today, with high student debt and low interest returns for seniors, the consumption growth model just isn’t working. The Fed’s characterization of household spending (per their April 27 press release) is that it has “moderated,” which is Fedspeak for “slowing.”
The experiment with negative interest rates in Japan has been a failure, and it looks to be so in Europe too. Nevertheless, the academics that now run the world’s central banks continue to push interest rates lower because economic theory says that lower rates reduce the cost of capital and produce economic growth. Perhaps that is true in “normal” times, but maybe, just maybe, the textbook solutions don’t work at the extremes because other factors, like the ones described above, come into play.
Poor policy choices
The U.S. has the highest corporate tax rate in the first world. U.S. tax policy is simply anti-growth and is a huge disincentive to invest organically in the U.S. In addition, Obamacare and other added regulatory burdens are having a huge impact on small business formation and growth.
But, worse, the U.S., along with every other major first world government, has given up the use of fiscal policy as a macroeconomic tool, leaving the heavy lifting to monetary policy, which, with its blunt interest rate and money creation tools, is ill-equipped for the task. In the U.S., the tax take is now outpacing spending growth by a 3-to-1 ratio. When I learned economics, that was what you did when the economy was growing too fast, not when it is struggling to grow at all.
Conclusion
None of this is likely to change soon. A Fed that continues to be uncertain is a Fed that continues to do nothing. This means that rates are lower for longer despite this being a major cause of lagging consumption and GDP growth. And with a Congress so aware that tax policy is a major issue but unwilling to do anything about it, there is little hope for real fiscal stimulus at least until sometime in 2017. For investors, continued focus on dividends and assets that have large cash throw-offs, selling at highs and buying the dips in a range-bound market, appears to be the best strategy.
Robert Barone (Ph.D., Economics, Georgetown University), an advisor representative of Concert Wealth Management, is a Principal of Universal Value Advisors (UVA), Reno, NV, a business entity. Advisory services are offered through Concert Wealth Management, a Registered Investment Advisor. All accounts welcomed. Robert is available to discuss client investment needs. Call him at (775) 284-7778.
Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information. A more detailed description of Concert Wealth Management, its management and practices is contained in its “Firm Brochure” (Form ADV, Part 2A) which may be obtained by contacting UVA at: 9222 Prototype Dr., Reno, NV 89521. Ph: (775) 284-7778.
