An Economic Primer and Forecast from Professor Mike Walden
I really enjoyed hearing Professor Mike Walden from NC State speak at the NC Museum of Art this morning. Mike gave a really nice talk on the fundamentals of economics, as well as some interesting observations about the impact of the presidential elections and the condition of the local economy as well. Here is a transcript of his talk.
We are at the tail end of the election cycle. The economy has been front and center. The top issue – have we been growing, and productivity has been holding us back. Where are interest rates going? What is the impact of the election?
We re growing – but very slowly. This was the worst recession – a contracting of the economy, and we are past the recession which ended in 2009. But if you look at GDP, GDP per capita, and payroll jobs – are growing at 2.4, 1.4, and 1.9% respectively. This economic recovery has been the slowest in history. Various election candidates have ideas about this and how to turn this around. Rowth rate and GDP when compared to history.
On the demand side, one of the biggest factors is income inequality. As the economy grows, more of the growth is for high income people, and less to lower and middle income. Doesn’t mean they are getting less, but their take of the growth is less. You can argue that economies grow when people are buying stuff, in order to have a business that hires people and pay people. What you find is that high income people don’t buy as much stuff – and do more investing. Lower income people spend more of their disposable income. So if you don’t see as much spending, than the economy grows at a slower rate. Other arguments are that people stay in school later.
The Supply Side explanation – is one that you often hear. If we are not growing it is because there are disincentives for workers to produce. We need to relax those.. This focuses on tax rates, regulations, and other components that will increase jobs and production.
But there is a major change in the presidential views. Clinton’s focus on increasing taxes on higher income are the prescription is you were on the demand side of the equation. So if we give more income to lower income people, they will spend more, and the economy will grow more. They also advocate help with college debt, child care, and early childhood education.
Mr. Trump’s prognosis is a supply side argument. His arguments are that we are growing slowly because workers aren’t incented, so we need to lower taxes and regulations. He is vague on regulations to be lowered. He has a very aggressive tax plan reduction.
These competing perspectives are not new, but display the differences in these two camps. But wait – there is also a third explanation: we are an aging population. All developed countries are aging and experiencing slower economic growth. Our growth rates are arguably higher than those in other countries – so there must be a common thread – and the idea of an aging population going up, the birth rate and number of people who are younger is going down. When you age, you become more frugal. You are in an established household, so you are not only going into debt for the house, but for a washing machine, etc. And there is more saving in bonds, etc. which also decreases economic growth.
One of the biggest worries is interest rates. This has been a dramatic change over the last little while – and the 10 year interest rate has continued to drop. Some argue the Federal Reserve has managed it in a better way, and people don’t borrow as much, and the demand for borrowing is not as high due to the older population, so interest rates will also go down. And demand for new products is not as much, and the demand for borrowing has also gone down. And finally, the internationalization of finance has driven the flow of global money everywhere, which some argue is why there was more money coming in that fueled housing prices and easy money. We may see a bump in interest rates, but it is unlikely that we will see an increase.
Along with this there has been a dramatic drop in inflation. This has trended down to about 2% today. There have been some dramatic shifts in food prices, and people have been eating in more and out less. Most economists believe both numbers will continue to be low.
For energy, the price of a barrel of oil rose, and then dropped dramatically in 2009. Prices went up again until 2014, and then dropped again due to hydraulic fracturing technology, which allowed drillers to find oil in new places that were unattainable previously.
Housing prices also had a boom, which ran its course, and a dramatic drop-off on housing prices, which dropped by one third after doubling between 2006-2010. There was never a housing crash like this – at a time when banks felt that mortgage loans were the safest bet. Alan Greenspan said he felt there would never be a housing crash as there never had been. The housing market is improving, but one of the big questions is what will the millenials be doing – between 1980-2000 – about 76M generation of people. They are taking over the economy, and have been different in a number of ways. They have largely avoided buying homes and are renting, because they have been delaying marriage, staying in school longer, and eventually they finish school, pay off debt, and marry. But will they rent condos downtown, or buy homes in the suburbs? This will impact a lot of elements in the economy.
The likelihood of an increase in interest rates? The Federal Reserve has been in a bind. When we have another recession, which is likely to occur, in the next presidency. It will likely be a mild recession. But what happens is that lowering interest rates is what the Fed responds. But if interest rates are zero, how do you respond? You can move to negative interest rates, which has occurred in some countries. In several countries, the question is what will I have to pay you to keep my money? The Federal Reserve has stated they do NOT want to move in this direction, to go to negative interest rates. So they would like to increase rates at some point. The Federal Reserve is a semi-independent organization that gets money from federal banks.
The Federal Government, on the other hand, has continually increased the debt. We will know what those prescriptions will be likely in the next few months. But what can we do in terms of forecasting the future? Mike predicts Real GDP growth of 2.2-2.4%, unemployment will remain at 4.4-4.5%, inflation will grow bo 1.7-2%, and the real benefit will be an increase in real disposable income of 3.0-2.5%.
But what about North Carolina? We tend to follow the national economy. The growth rate in blue for NC and in red for the US were almost identical. Our demographic make-up is more like the national economy and we are a Purple state – a combination of red and blue, Republicans and Democrats. Our state unemployment rates are however slightly higher then the US average. This has occurred primarily in the last three years, as prior to that time the state unemployment rate was much lower then the US average. If you are in a Charlotte or Raleigh, or a metro area, the economy is much better. But if you are in a rural area, unemployment is in the double digits, and is much more severe. And as many as one-third of counties may depopulate as more people go to the urban centers. Having said that, NC has a lot of advantages, as there is more movement to the south, a lower cost of living, a right-to-work state, and there is room to grow. Mike noted that the NC economy was re-made from a textile economy to a new economy in a very short period of time, a topic of his recent book.
One of the major social shifts in the coming decade will be aging. In 2010, 13% of people were over 65. In 2050, 21% will be over 65. This will have a dramatic impact on the overall economy with an aging population. The forecast is that only those with more education will get ahead, as we move more towards a “brain-based” economy, as more machines are doing more manual labor. Automation is evolving even for tasks like brick-laying! But a lot of white collar jobs, like paralegals, will also be impacted, which can be done by computers.
My own comment: this is a good time to get a degree in supply chain management!
