Are You In Favor Of Economic Growth?

It’s not every day you see a former Reagan Administration official – Martin Feldstein, chairman of the Council of Economic Advisors during the Gipper’s first term – call for a $1 trillion public works program to stimulate the economy, but there it was on the New York Times oped page today.

Feldstein wants the Federal Reserve to get out of the stimulus business – its quantitative easing, which produces negative real interest rates, encourages extreme risk taking he explains – and suggests Congress and the Obama Administration step in and do some more effective stimulating:

“To get the economy back on track, President Obama should propose, and Congress should enact, a five-year fiscal package that would move the growth of gross domestic product to above 3 percent a year and focus on direct government spending on infrastructure.”

Feldstein explains:

“The total price tag over five years would have to exceed $1 trillion to achieve the needed rise in the economic growth rate. The lack of “shovel-ready” projects is not an excuse for not pursuing this strategy or for diverting the funds into income transfers and other low-impact spending of the kind that made the 2009 stimulus so ineffective. It would be better to spend a year or two preparing for the right kind of spending.”

He has a plan to pay for it to, which you can read.

The notion will likely pass without much comment, and that’s too bad, because Feldstein’s right that the Fed deserves a breather, but that we need a different, and more effective, player on the field. Should the Fed begin to taper its bond buying soon, as expected, it will do so with an economy growing slowly and too many people not working.

US Labor Force Participation Rate Chart

US Labor Force Participation Rate data by YCharts

Though much maligned, the Fed’s efforts came in large part because Congress and the Administration refused to do more after the initial stimulus package that Feldstein rightly criticizes for its poor implementation. So, the Bernanke Fed stepped in. Inflation worriers and Fed haters have attacked the efforts, and at times there seemed to be a noisy consensus among these folks that we could shrink our way back to prosperity. Not likely. (They actually were positing that the "markets," with less government spending or stimulus, would work all this out. Sounds good until you think about it.)

The inflation worries were, well, silly. The Wall Street Journal provides a nice instructional article today on the flexibility of markets in a global economy, and how, faced with a rising price, industries and countries adapt and head off inflation.

That didn’t stop the gold price from soaring in the early years of the recovery, but it says here that the metal soared on ill-founded worries and speculation, which is why it finally began to fall.

Gold Price in US Dollars Chart

Gold Price in US Dollars data by YCharts

The old hallmarks of inflation are harder to find in a global economy, where an abundance of capital and accelerating technologies fix problems quickly. Shortages? Not many, and it would seem from the capacity utilization chart here, we could make a lot more stuff without risking a rerun of the Weimar Republic. China seems willing, too.

US Capacity Utilization: Manufacturing Chart

US Capacity Utilization: Manufacturing data by YCharts

More closely followed economic indicators -- core inflation, weekly earnings of workers and producer prices -- show scant signs of inflation in recent years. Those percentage increases aren't annual -- that's the total percentage increase over a five-year period.

US Core Producer Price Index Chart

US Core Producer Price Index data by YCharts

Investments, however, are an exception. Stocks, as represented by the S&P 500, have soared and, with interest rates so low, a good chunk of the rise is owed to people hunting for returns that can’t be found elsewhere.

^SPX Chart

^SPX data by YCharts

Would the likes of Tesla (TSLA), Zillow (Z) and Netflix (NFLX) keep levitating should government policy shift from easy money to actual investment in infrastructure to support the entire economy?

TSLA Chart

TSLA data by YCharts

It’s doubtful a $1 trillion federal infrastructure program would be as well loved by investors as the Fed’s easy money program. Long-term, however, it might be better for everyone.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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