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A week spent in the US talking to Americans can usually be guaranteed to restore the spirits. The residual dynamism, energy and optimism are so striking, even in a week such as this when the country’s darkest side has been on display in the unimaginable horror of the murders in a church in Charlestown.
But what is most notable about the economic situation in the US is how far we are into the cycle already. I don’t just mean that there are some classic warning lights flashing. When Uber, which – let’s face it – is only an app for a virtual cab company, is talking about a crazy valuation of $50bn, it suggests that at least one bubble is about to burst. Indeed, the California Labour Commission ruled this week that Uber drivers are employees, not contractors, which could have an interesting impact on Uber’s business model and the sharing economy, at least in California.
More broadly, consider also the scale of what has been tried by policy makers – in the US and Europe – in the period since the crisis, and then look at the real results stripped free of spin. Since the events of 2008 and 2009 we have seen a response unprecedented in peacetime from authorities desperate, to their credit, to stop the aftermath of the financial crisis turning into a sustained depression.
When the US Fed met this week, it was to discuss the first rate rise in nine years. Yes, that is nine years. The response cooked up in that time has involved not only sustained low interest rates, but also epic amounts of QE and bond buying.
But the best that can be said for the impact of this post-crisis effort is that perhaps – perhaps – it has staved off conditions that could have been much worse if a different course had been taken, which is of course an unprovable hypothetical.
What we do know is that the Fed has bloated its balance sheet to $4.5trillion – a figure equivalent to roughly 25% of US GDP – and despite this, US growth has still not exceeded 2.5% in the last five years. That is even with the added bonus of a shale boom which has reduced costs, boosted growth rates and set the US on the path to energy self-sufficiency.
So despite all that activity, and the extension of Fed power, the result has been years of less than stellar growth, and also incomes that disappoint for many Americans.
Look at the graph of household median incomes in the US since 1975, produced by Brookings earlier this year, and what you see from 2000 is a fall or flatlining in every age group, apart from those aged 25-29 in 2001. It is not hard to see why voters on the left, right and in the middle might conclude that the engine of advancement for many people, and their families, has stalled. Capitalists have to think seriously about how to improve these trends, to re-popularise markets.
In the US it turns out that the cumulative result of 15 years of government policy, taking in the high spending Bush administration, followed by the Obama years, with near zero rates and QE, is as follows. A series of asset price bubbles, intermittent explosions and ever more government firepower which skews incentives, discourages saving and industrial investment, and leads to the misallocation of capital and further difficulties down the line. But apart from that, it’s been great.
However, can the answer to this long-term, deeply ingrained problem, for which both American political parties share the blame, really be more government action as the Left suggests? Hasn’t government action been tried enough?
Indeed, the Congressional Budget Office this week issued a startling report that suggested that demography and entitlements mean that the US is going to have to either dramatically increase taxes – with obvious harmful effects on growth – or dramatically trim spending in the decades ahead.
Surely, if that American dynamism that I mentioned earlier is to be put to good effect, driving innovation and broadening prosperity, clogging the arteries of the economy with higher taxes (and a mess of a tax code) is not a good idea. That will only ensure that consumers do not get the full benefit of the exciting possibilities in medical innovation, technology and robotics that lie ahead. What is needed instead is a smaller, more efficient and more effective government, along with the unleashing of more capitalism.
