Saturday, February 11, 2017

I disagree: this is bad

From a brief perusal of Vanguard's* investment blog, this interesting set of statements from Vanguard's chief economist (emphasis mine):
...At the start of 2016, the Fed projected that the federal funds rate would revert to a long-term average of 3% to 4% sometime after 2019. Rates in that neighborhood are consistent with growth (and inflation) rates similar to the 3%-plus expansions fueled by a growing labor force and heavy borrowing in the decades before the housing crisis. 
That’s unlikely. Those one-time boosts are behind us. We estimate that the U.S. economy has a potential growth rate of about 2% per year. This is neither good nor bad; it’s simply a consequence of demographic, technological, and market forces that have been reshaping growth, inflation, and interest rates for decades....
First, let me say that I agree: it seems to me that the long-term trend for GDP in the United States is closer to 2% than 3%. (Note: the first reporting of GDP growth for Q1 2017 is April 28. That will be an interesting day.) 

Second, I don't understand how Dr. Davis can say that "2% a year is neither good nor bad." A lower long-term GDP growth for the country is bad for its citizens, it would seem - it would mean less income, less wage growth and fewer jobs. Am I wrong for thinking this? 

*I'm a very big fan of the Vanguard approach to investing (i.e. indexing.) I'm boring (and possibly stupid) like that.

7 comments:

  1. For some, lack of economic growth is the ideal.

    https://theconversation.com/time-for-degrowth-to-save-the-planet-we-must-shrink-the-economy-64195

    And this is not just a "loan wolf", read the comments.

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    1. The problem is that zero-sum games don't tend to end well, and they probably are likely to reinforce current statuses (the currently well-off can afford better weapons and defenses to keep the hoi-polloi at bay, and incentives to reduce the size of the armed mobs arrayed against them). It also requires stability in population - otherwise, people's standards of living will likely decrease over time, which will not help.

      In general, if the suggested idea requires people to be at heart different then they have been, historically, then it's probably going to fail, badly. People can change, but not usually by fiat.

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  2. It is my humble judgement that the US economy on an average will never top 3%. May be in future there will be some quarter where it will be 3+%. But it will never top the 4+%, ever, that our President predicts! We elected a lying liar!

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  3. You should be able to get away low growth and not too much political unrest if the GDP/PPP keeps increasing and inequality doesn't. If the population is falling (which it isn't in the US), then low GDP growth is technically okay, as long as the benefits are transferred to the younger workers in higher wages, and not gobbled up by older investors as seems to be the case in Japan. It should be possible to survive secular stagnation, but the economy in the US with maximizing shareholder value and low social investment, is not structured for that right now, so we need higher GDP growth.

    The bigger problems in the next five years are the super low and negative interest rates that are meant to encourage investment, but instead just mean the banks keep all their money in cash and the debt keeps growing at an astronomical rate. And also if I get tenure or not.

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    1. Except the benefits aren't being transferred to younger workers - they have lower wages, and less job security than their parents did, and because older people are more likely to vote, they will likely vote to preserve their benefits at the cost of their children. In addition, living expenses are likely to keep going up, and education loans are substantially more costly for younger workers, meaning that their standard of living will be worse than their parents without either additional debts or loss of government benefits, both of which are likely to happen.

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  4. 2% growth is a natural consequence of the following: birth rates are down and inflation is pretty low. The increase in automation also naturally decreases labor demand while increasing production (thus lowering the prices of goods/services). Would you rather have the volatility of the 70's and 80's? Rampant inflation, a tripling of gas prices overnight? 15% overnight interest rates? While all of that is exciting, after living through the global financial crisis, I'm fine with super-boring low and slow growth.

    The worst case scenario is we become Japan: aging population, extended stagnation and zero inflation. US immigration policy will dictate whether that becomes a reality or not.

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    1. I really appreciated this comment - thanks for the reminder of the relative economic negatives of the 70s and 80s.

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