President Obama’s Essay on Economic Policy after the Election: “The Way Ahead”

The Economist

“The Way Ahead” – President Barack Obama.


Much of the protectionist mood in the US is driven by anti-immigrant sentiment and a resurgence in nativism

“How has a country that has benefited—perhaps more than any other—from immigration, trade and technological innovation suddenly developed a strain of anti-immigrant, anti-innovation protectionism?… Much of this discontent is driven by fears that are not fundamentally economic. The anti-immigrant, anti-Mexican, anti-Muslim and anti-refugee sentiment expressed by some Americans today echoes nativist lurches of the past”


Rise in inequality and slow growth in income for the low- and middle- class has also contributed

“But some of the discontent is rooted in legitimate concerns about long-term economic forces. Decades of declining productivity growth and rising inequality have resulted in slower income growth for low- and middle-income families. Globalisation and automation have weakened the position of workers and their ability to secure a decent wage”


Also a growing resentment of business and political elites

“And the financial crisis of 2008 only seemed to increase the isolation of corporations and elites, who often seem to live by a different set of rules to ordinary citizens.”


Despite these negatives, trade, globalization and technology have been overwhelmingly beneficial to the US

“Over the past 25 years, the proportion of people living in extreme poverty has fallen from nearly 40% to under 10%. Last year, American households enjoyed the largest income gains on record and the poverty rate fell faster than at any point since the 1960s. Wages have risen faster in real terms during this business cycle than in any since the 1970s. These gains would have been impossible without the globalisation and technological transformation that drives some of the anxiety behind our current political debate.”


To restore people’s trust in the forces of capitalism and globalism, the inequality gap needs to be addressed

“Economists have long recognised that markets, left to their own devices, can fail. This can happen through the tendency towards monopoly and rent-seeking that this newspaper has documented, the failure of businesses to take into account the impact of their decisions on others through pollution, the ways in which disparities of information can leave consumers vulnerable to dangerous products or overly expensive health insurance… A world in which 1% of humanity controls as much wealth as the other 99% will never be stable. Gaps between rich and poor are not new but just as the child in a slum can see the skyscraper nearby, technology allows anyone with a smartphone to see how the most privileged live. Expectations rise faster than governments can deliver and a pervasive sense of injustice undermines peoples’ faith in the system.”


Radical change, however, is not the answer

“As appealing as some more radical reforms can sound in the abstract—breaking up all the biggest banks or erecting prohibitively steep tariffs on imports—the economy is not an abstraction. It cannot simply be redesigned wholesale and put back together again without real consequences for real people.”


President Obama advocates fiscal stimulus to boost productivity growth

“A major source of the recent productivity slowdown has been a shortfall of public and private investment caused, in part, by a hangover from the financial crisis. But it has also been caused by self-imposed constraints: an anti-tax ideology that rejects virtually all sources of new public funding; a fixation on deficits at the expense of the deferred maintenance bills we are passing to our children, particularly for infrastructure; and a political system so partisan that previously bipartisan ideas like bridge and airport upgrades are nonstarters.”


Unions flexible enough to not hinder American trade policy, and tax policy are key to addressing inequality

“In the future, we need to be even more aggressive in enacting measures to reverse the decades-long rise in inequality. Unions should play a critical role. They help workers get a bigger slice of the pie but they need to be flexible enough to adapt to global competition. Raising the Federal minimum wage, expanding the Earned Income Tax Credit for workers without dependent children, limiting tax breaks for high-income households, preventing colleges from pricing out hardworking students, and ensuring men and women get equal pay for equal work would help to move us in the right direction too.”


New trade deals— the Trans-Pacific Partnership and the Transatlatnic Trade and Investment Partnership— will make American firms more productive and lift wages for workers

“Lifting productivity and wages also depends on creating a global race to the top in rules for trade. While some communities have suffered from foreign competition, trade has helped our economy much more than it has hurt. Exports helped lead us out of the recession. American firms that export pay their workers up to 18% more on average than companies that do not, according to a report by my Council of Economic Advisers. So, I will keep pushing for Congress to pass the Trans-Pacific Partnership and to conclude a Transatlantic Trade and Investment Partnership with the EU. These agreements, and stepped-up trade enforcement, will level the playing field for workers and businesses alike.”


Unemployment insurance and educational opportunities should be used to address employment

“There are many ways to keep more Americans in the labour market when they fall on hard times. These include providing wage insurance for workers who cannot get a new job that pays as much as their old one. Increasing access to high-quality community colleges, proven job-training models and help finding new jobs would assist. So would making unemployment insurance available to more workers.”


Post-crisis reforms have made the the US financial system more stable

“There should no longer be any doubt that a free market only thrives when there are rules to guard against systemic failure and ensure fair competition. Post-crisis reforms to Wall Street have made our financial system more stable and supportive of long-term growth, including more capital for American banks, less reliance on short-term funding, and better oversight for a range of institutions and markets. Big American financial institutions no longer get the type of easier funding they got before—evidence that the market increasingly understands that they are no longer “too big to fail”. And we created a first-of-its-kind watchdog—the Consumer Financial Protection Bureau—to hold financial institutions accountable”


As evidenced by today’s interest rates, monetary policy alone should not bear the burden for boosting productivity

“With today’s low interest rates, fiscal policy must play a bigger role in combating future downturns; monetary policy should not bear the full burden of stabilising our economy. Unfortunately, good economics can be overridden by bad politics.”


Fiscal policy has been blocked these last four years by Congress

“My administration secured much more fiscal expansion than many appreciated in recovering from our crisis—more than a dozen bills provided $1.4 trillion in economic support from 2009 to 2012—but fighting Congress for each commonsense measure expended substantial energy. I did not get some of the expansions I sought and Congress forced austerity on the economy prematurely by threatening a historic debt default. My successors should not have to fight for emergency measures in a time of need. Instead, support for the hardest-hit families and the economy, like unemployment insurance, should rise automatically.”

BOE Agents’ summary of business conditions August 2016

Brexit will affect certain aspects of the economy negatively

“Overall, respondents expected a negative effect from the vote on turnover, capital spending and hiring activity over the next twelve months…Across sectors, the expected effects on turnover were most negative for business services and construction.”

Softer business services

“Business services turnover growth had softened further, partly reflecting weakness in commercial property investment and other corporate transactions, such as merger and acquisitions activity…Activity in the commercial real estate sector had been materially affected by the referendum result, with the investment market in London particularly weak. Occupier demand had held up better.”

Slower growth in consumer spending

“Annual consumer spending growth had eased further, with unseasonal weather likely to have been a significant factor. Consumer caution had increased prior to and since the referendum, reducing demand growth for larger-value goods.”

The depreciating GBP has been a boon to manufacturing export volumes


“…for manufacturing there was a slight positive effect on balance, reflecting an expected boost to export demand from the fall in sterling. But exports overall were expected to be broadly unaffected, as that positive effect was offset by an adverse impact on services exports associated with lower commercial real estate and mergers activity by overseas investors.”

G20 Finance Ministers and Central Bank Governors Meeting Communique 23-24 July 2016

The Global economy is recovering slowly though significant risks persist

“The global economic environment is challenging and downside risks persist, highlighted by fluctuating commodity prices, and low inflation in many economies. Financial market volatility remains high, and geopolitical conflicts, terrorism, and refugee flows continue to complicate the global economic environment..”

Brexit added to uncertainty but they are positioned to address the consequences.

“ the outcome of the referendum on the UK’s membership of the EU adds to the uncertainty in the global economy. Members of the G20 are well positioned to proactively address the potential economic and financial consequences stemming from the UK referendum. In the future, we hope to see the UK as a close partner of the EU.”

They are determined to see growth using all tools possible with clear communication of actions

“We are taking actions to foster confidence and support growth. In light of recent developments, we reiterate our determination to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth…We will carefully calibrate and clearly communicate our macroeconomic and structural policy actions to reduce policy uncertainty, minimize negative spillovers and promote transparency.”

They promise to not use competitive devaluation & protectionism

“We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability…We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes. We will resist all forms of protectionism.

A steely response to excess steel capacity

“We recognize that excess capacity in steel and other industries is a global issue which requires collective responses… The G20 steelmaking economies will participate in the global community’s actions to address global excess capacity.”

Reaffirmed support for financial reforms including Basel III

“Recent market turbulence and uncertainty have once again highlighted the importance of building an open and resilient financial system. To this end, we remain committed to finalizing remaining critical elements of the regulatory framework and the timely, full and consistent implementation of the agreed financial reforms, including Basel III and the total-loss-absorbing-capacity (TLAC) standard as well as effective cross-border resolution regimes.”

The end of fossil fuel seems nigh as commitment to end them is reaffirmed.

“We reaffirm our commitment to rationalize and phase out inefficient fossil fuel subsidies that encourage wasteful consumption, over the medium term, recognizing the need to support the poor. Further, we encourage all G20 countries to consider participation in the voluntary peer review of inefficient fossil fuel subsidies that encourage wasteful consumption.

Joint Press Release on the ‘1+6’ Round Table July 22nd 2016

Participants: Premier Li Keqiang, World Bank Group President Jim Yong Kim, IMF Managing Director Christine Lagarde,  WTO Director-General Roberto Azevedo, ILO (International Labor Organization) Director-General Guy Ryder,  OECD Secretary-General Angel Gurria  and FSB (Financial Stability Board) Chairman Mark Carney

Sluggish global growth, significant risks persist

The global economy is sluggish and faced with downside risks and uncertainties…We recognize that aggregate demand will remain weak in the short run, and it will take time for supply-side policies to show effects, so a comprehensive package of policies are needed to strike a good balance between short-term and long-term goals…Notwithstanding the improvement in resilience brought about by post-crisis financial reforms, the global financial system faces pronounced risks, which could be amplified by the slow-down in global growth.

Monetary, Fiscal and and Structural tools to be used and communicated effectively

Strong, combined and coordinated efforts are needed, including use of all policy tools – monetary, fiscal and structural – to deal with risks and uncertainties in the world economy, safeguard financial stability and support economic growth. …Well-calibrated and effective communication of policy stances will help to boost confidence, enhance policy effectiveness, and limit negative spillovers.

China continues to play a key role in recovery

China has taken the initiative to adapt to and guide the economic New Normal. While supporting aggregate demand, China continues to strengthen the structural reform, especially the structural reform on the supply-side, break a path for growth, accelerate the shift of growth models from emphasizing size and speed to quality and efficiency, and boost sustained driving forces for growth

Shared directions of structural reforms to play a key role in fostering global economic growth  

While country circumstances differ, there are shared directions of reform in general terms, including deregulation, enhancing competition, encouraging innovation, promoting fiscal reform, promoting trade and investment, strengthening the financial system, advancing labor market reform, improving infrastructure, enhancing environmental sustainability and promoting inclusive growth.

Mixed global employment outlook

The current global outlook for jobs is mixed with slower growth leading to weaker prospects for employment and wages in many countries. Rising inequality and the risk of setbacks to the global drive to reduce poverty, make policy initiatives to increase opportunities for decent work a priority.

How Many Hours of Work Does it Take to Buy…

The reason that economists adjust nominal data to “real” numbers is that they are trying to create a better picture of general welfare after adjusting for inflation.  If an economy produces $100 worth of widgets one year and $150 worth of widgets the next, the dollar increase doesn’t tell you much if the price of a widget also rose from $100 to $150.  In that case the economy has still produced one widget in the year, so welfare has not changed and theoretically real GDP should be flat.

At a fundamental level, “real” economic numbers are an attempt to measure output against time.  In the previous example, the data was adjusted to have a more clear picture of the number of widgets produced per year.  For humanity, time is really the only scarce resource there is.  Therefore, the number of hours worked that it takes a person to buy an item is the true measure of welfare.

Today’s employment report showed that average hourly earnings fell slightly to $23.58.  Below are charts of the number of hours that it has taken to purchase a home, a barrel of oil, an ounce of gold and “an S&P 500,” at the prevailing hourly wage of the era.  In general a downward slope would mean that societal welfare is increasing because it would take fewer hours to buy the same good.

Duration of Economic Expansions

From time to time one may still hear analogies linking our current economic period to the Great Depression.  Most know that the Depression consisted of two separate recessions, one which started in 1929 and the other in 1937.  The intervening period was technically an expansion but wasn’t much to write home about.  

Our current economy is also often compared to the 1970s because the stock market went sideways for about a decade during that time as well before ultimately culminating in the early 80s inflationary recession.

If each of those periods are comparable and we sit in an economic purgatory between one recession and another, it might be at least mildly comforting to think that the next recession could still be a year away. The economic expansion between 1933-1937 lasted 50 months and the expansion from 1975-1980 lasted 58.  Our current expansion is still only 39 months old.  Just a babe!  A full list of economic expansions can be found here.

ISM as Recession Indicator

ISM was reported at sub 50 for the 3rd month in a row.  Does that mean that a recession is imminent?

Below is a chart of ISM stripped down to only include times that the indicator has been below 50 for at least 3 months in a row.  There have been roughly 17 periods in which ISM has had a 3 month sub-50 streak.  Of those 17 times, 6 have been outside of a recession: 1951, 1967, 1985, 1995, 1998 and 2003.

July Economic Data Summary

Over the course of any month there is a heap of economic data that is released by various governmental and quasi-governmental organizations.  The data can come so quickly that it’s often difficult to keep track of what has shown strength or weakness and which indicators are beating or missing Wall Street estimates.  To try and help summarize what was released in July, below is a list of 32 of the more important economic releases last month.  Of these 32 releases, 14 (~44%) missed expectations.

Tupperware Commentary 2Q12

An interesting take on the world economy from Rick Goings, CEO of Tupperware, an extremely global company:

I spent a lot of time this last month doing not only big group but one on one meetings with the investment community, not only in the United States but more and more focusing on Europe where people tend to hold longer. And but one of the key questions I’m asked almost everywhere I’m, is people want to tap into what are we seeing out there and what do we hear out there?
They understand that the bulk of our sales and profits are outside the U.S., which by the way is only 5% of the world’s population and this is an important question because the perspective one has, if they are getting their news from Wall Street Journal, Financial Times, CNBC or even many U.S.-based analyst reports, one would think that the world is in chaos and it’s bleak out there.
And yet, we just did a review and quite frankly, our perspective is there’s more firm places, more (inaudible) firm out there in the world and things look pretty good and look better than we’ve seen in years. Here’s a brief scan.
In Europe, contrary to what you may read, Europe is not going to fall into the Mediterranean, although it sells newspapers. Politicians there are showing a never before level of commitment and flexibility as they work to hold euro land together. And they are driven by two major things, the desire for peace and economic necessity.
But I do the review and I say well, CIS under Putin, Medvedev, Russian style but it works and we feel good. Nordics look good, Germany looks good. We get down into Turkey, looks good. Greece, who cares, it’s too small, Italy, 66 governments since the Second World War, its stability Italian style.
And then we turn it up, Benelux looks good and it is interesting in France, even under Holland, an interesting perspective. Most of the dramatic changes in governments with regard to repositioning government spending to be less happened under mid land who was an extreme left wing. So we, because he had the ability to bring the assembly within, so I feel, okay, about Europe.
Turning to Latin America, a few topline points in major markets, I already mentioned about the PRI in Mexico. So I feel good about that. In Venezuela, it appears Chavez’s grip is slipping, plus he’s sick, Brazil, fifth largest population in the world, sixth largest economy in the world and a real bright future.
In Asia, finally, 40% of the population, China, India, Indonesia and the driving force is going to be the explosive growth of their middle class, which is going to move from $500 million to $1.7 billion by 2020. In each of these markets, importantly, we have been awarded the status Superbrand. This is interesting, because we’ve never advertised.
Now, I know when somebody reads the recent talk of China’s economy slowing, two things are important to remember. Number one, it’s still growing at 7.5% and number two, the government which is very directive has been proactive with the stimulus and matter of fact, they cut the borrowing rates to stimulate the economy twice in one month.
So, net-net, before I turn it over to Mike, a final thought. When you put it all together, we’re confident in our portfolio and our future. We’re not going to hit on all cylinders in every quarter.