Federal Reserve Board should focus on higher GDP growth to reduce income inequality and poverty

Posted by Shyam Moondra

During the administration of President Barack Obama, we have had a slow-growth economy and lower inflation. However, Obama left a record 40 million Americans under poverty level (defined as income of $30,750 for a family of four) in spite of his significant increase in welfare spending to the tune of $1 trillion (Obama was the first president to spend more on welfare than on defense). The current administration of President Donald J. Trump pushed for higher sustained economic growth via lower taxes, reduced regulations, and more favorable trade deals with global trading partners. In a short period of one-and-half years, the unemployment rate has gone down to 3.7%, the lowest in the last 49 years, and unemployment among African-Americans and Hispanic population has gone down to the lowest level ever. So the key to reducing income inequality and poverty is sustained 3-4% GDP growth and not limiting inflation to an arbitrary 2.5% as currently targeted by the Federal Reserve Board (FRB).

The FRB expeditiously wants to increase the funds rate to a "normalized" level which is somewhat arbitrary because what was "normal" yesterday may not be "normal" today, depending on a multitude of issues related to global trade, regulations, and tax policies. In anticipation of higher inflation caused by growing economy, the FRB has been increasing interest rates that are negating the positive results achieved by Trump’s fiscal and trade policies. Higher interest rates are already slowing down housing and auto industries that are the backbone of the U.S. economy. Also, higher interest rates are making dollar stronger relative to other major currencies, which is exacerbating the trade deficit problem and making it harder for Trump to achieve his goal of cutting trade deficit by half. Therefore, the FRB’s monetary policy designed to keep inflation under control is acting against Trump’s policy of high sustained growth designed to reduce income inequality and poverty in America. If Trump’s policies reinvigorate the manufacturing sector in the U.S. (new 700,000 high-paying manufacturing jobs have already been added since Trump was inaugurated), the average wage level will go up. Therefore, the FRB shouldn’t be exclusively concerned with inflation, so long as wages are increasing at a faster rate. If the FRB is overly aggressive with their interest rate increases, the corporate world would reduce capital investments in anticipation of economic slowdown which would hurt the economy in the long-term. Higher economic growth and capital expansion must go hand-in-hand to achieve higher employment levels while keeping inflation under control. In recent years, Germany has had near zero interest rates for many years and yet it became the most prosperous country in Europe.

Rather than be solely focused on anticipatory inflation and using the outdated Phillips Curve (inflation vs unemployment) as its guiding principle, the FRB needs to find a way to maintain high growth while at the same time keeping inflation in check by aligning monetary policies with fiscal policies to create an environment where businesses feel confident about making new capital investments. The FRB has been creating these artificially manufactured boom-and-bust cycles by adjusting interest rates lower or higher, but these cycles make it impossible to make a dent on poverty which can be reduced only by sustained high economic growth.

To get the optimum results for the country, we need the FRB to come up with a new model which has the funds rate fixed at a nominal rate, say between 1 and 2% (and it should be changed only in emergency situations), while using other tools at its disposal to focus on growing economy at 3-4% a year.  We need a collective monetary and fiscal policy approach to achieve the best possible results for the American people in terms of higher growth, higher wages, lower unemployment, lower trade imbalances, and increased wealth creation. If we can maintain the current GDP growth with low inflation while freezing funds rate at the current level, we should see a significant reduction in income inequality and poverty in the coming years.

Trump will remain steadfast on equal and fair global trade

Posted by Shyam Moondra

After the World War II ended, the U.S. undertook a massive rebuilding effort for Western Europe (the so-called Marshall Plan which cost American taxpayers $115 billion in today’s dollars). Subsequently, the US adopted a very liberal trade policy to help Europe and Japan rebuild their economies so they could recover from the devastation of the war. The same thing happened with respect to China; after President Richard Nixon’s historic visit to China, China received our immense help in turning its communist era centralized economic system to free-market economy. Our accommodating policies were instrumental for these countries to become prosperous at our expense. Their relatively cheap labor enabled them to take advantage of our liberal trade policies; however, in the process, they decimated our textile, consumer electronics, automobile, steel, and other industries, which has proven to be very harmful to our industrial base. These countries even used currency devaluation as a tool to make their exports to the U.S. very cheap, while the U.S. leaders and the Congress mostly looked the other way (in case of China, we even overlooked their record on human rights). Later, Mexico and other underdeveloped countries became the beneficiaries of our liberal trade policies that helped them improve living standard of their people. Our liberal trade policies led to a huge annual trade deficit of nearly $800 bi with the rest of the world (the biggest five countries include China - $365 bi, Mexico - $71 bi, Japan - $69 bi, Germany - $65 bi, and Canada - $18 bi).  Our generous trade policies amounted to the biggest wealth transfer we have seen in the history of mankind. These accommodating trade policies created ghost towns in Michigan and Pennsylvania that saw automobile and steel plants being shut down. The prosperous Europe could have spent more on their defense rather than relying on the U.S. but, to the dismay of the U.S. policy makers, Europe instead chose to spend more on welfare programs based on their socialist ideology (that has already brought economic ruins to Greece, Portugal, Spain, Italy, and others) and taking care of the Middle-Eastern migrants from Libya, Syria, and Iraq  (that also included ISIS fighters disguised as asylum seekers, who committed terrorist attacks in Belgium, France, Germany, and the U.K.). Even today, the most prosperous European country, Germany, contributes below targeted amount (less than 2% of GDP) for the collective defense of Europe, putting more burden on American taxpayers.

In case of China, the U.S. policy was based on the thinking that as their economy improved, their record on human rights will also improve and China will one day become a true democracy. While China made some progress on human rights but one-party rule, censorship, and harassment of political opponents still continue even today. China is also using its newly acquired wealth to militarize at an alarming rate, threatening its neighbors’ security. China has also been building illegal artificial islands in international waters and militarizing them (in spite of its promises that it will never do that) which drew a warning from the U.S. Secretary of Defense, Jim Mattis, who said China is using “coercion and intimidation” against its neighbors and he warned that the U.S. would consider more aggressive responses to China’s militarization of these islands. When asked by a reporter about the ability of the U.S. to "blow apart" one of China's controversial man-made islands, Lt. Gen. Kenneth McKenzie, director of the Joint Staff, told reporters, "I would just tell you that the United States military has had a lot of experience in the Western Pacific taking down small islands." Also, China’s aggressive attempts to steal American technologies and inventions and profiting from them have become a real problem.

During the 1950’s through 1980’s, the U.S. was very rich and powerful compared to other countries, so there was never a concern about other countries becoming a serious competitive or security threat. But in the last 20 years or so, some of the countries that benefited from our liberal trade policies have increasingly become a threat to our economic well being as well as our security. During this time, no U.S. president had the courage to speak up against all this, even though we have been steadily losing our high-paying manufacturing jobs. Of course, that made our presidents very popular abroad (President Barack Obama, for example). But now President Donald J. Trump is saying enough is enough and his top priority is to stop the loss of manufacturing jobs and theft of our intellectual property. Trump will do anything to reduce trade deficit with China, Japan, Germany, Mexico, and Canada. So, obviously, Trump is going to be the least popular president around the world.

After the end of the Cold War, we also made generous gestures to Russia in terms of technology transfer and capital flow to help Russia become prosperous, but Russia’s President Vladimir Putin had other things on his mind such as his “sphere of influence” thing that led to annexation of Crimea, derailing the possibility of Russia also joining the ranks of countries that became rich at our expense.

Trump is right on trade issues and G7 would have to recognize that at their meeting in Canada this week. If our trading partners refuse to learn from the history of how much the U.S. let them take advantage of Americans, then who needs friends like that! The American people understand what Trump is trying to do on trades and taxes - to create more high-paying manufacturing jobs right here in the U.S. and, for the first time, focus more on making Americans wealthy again.