Crossroads (Toward Philippine economic and social progress)
Philippine Star,  27 March 2019


“Markets shudder as growth worries swell,” so wrote the Wall Street Journal (WSJ) issue of March 23-24 in its front page.

Away from the day-to-day happenings in Manila and secluding myself in a daughter’s house in the US to finish a number of my long-delayed writing projects – I cannot fully ignore what happens in this highly connected world.

Signs of economic slowdown. The WSJ article began by observing that global stocks and bond yields have slid as concerns about the health of the world economy worried investors.

Although stock indexes have rallied at the start of this year, this was so because the major central banks had backed off from their original plans of “normalizing” monetary policy.

By this, they meant that the early intentions of the central banks – namely and especially the US Federal Reserve and other major central banks – to slowly raise interest rates had been postponed for some time. The central bankers have asserted that their moves are “data driven.” As the leader – the US Fed decides – the other banks march in cadence.

Here are some indicators of worry mentioned by WSJ: (1) Factory output in the eurozone fell in March at the fastest pace in nearly six years. (2) US manufacturing activity fell to its lowest level in nearly two years. (3) Those indicators  sent bond prices rising and yields sliding, with the German 10-year bond yield falling below zero for the first time since 2016 and the yield on the US Treasury falling to 2.459 percent.

Meanwhile, (4) Equity stocks across the world retreated. All these, US did post weekly losses, along with those in Europe – France, UK, and Germany. (5) What worries some analysts is that while in the last part of 2018 and in early 2019 bond yields and equity stock price movements were counter-vailing each other, which means the economy was relatively stable. In this most recent information, bond yields and stock prices weakened. That these numbers are both in the same direction posed the alarm bell.

In another big news item in WSJ, (6) The US fiscal deficit has widened. The fiscal deficit rose 39 percent in the first five months of the fiscal year as government spending rose and tax receipts failed to catch up.

I might add that (7) Brexit developments in the UK have been messy and could not indicate a proper direction, thus adding paralyzing anxiety in Europe. Further, (8) The engine of China’s growth has been under threat of weakening more because of the China-US trade squabble.

The good news is that (7) and (8) are likely to be resolved within the next two months, so some uncertainty might clear up.

If the world economy is in some slow-down from these indicators, it is, however, not headed toward recession, only to a lower growth path. Recession is too strong a word.

Reminder: recent world monetary and fiscal history. What often happens in the big economic blocs determines how the world economy moves. The big players are the US, Europe, and China, but as the world’s biggest economy, the US leads the pack.

The early recovery from the 2008 recession in the world economy was made possible by the innovative program of monetary easing that Ben Bernanke as US Fed chairman initiated.

This program created new money when the economy was tight and hampered by limited demand. Fiscal policy was essentially closed in the US because of the conservative fiscal policy.

(The Republican-controlled-Congress during Obama’s Democratic administration closed off fiscal policy support to create demand through new deficits, although at the inception of the recession, the same Congress passed a rescue effort that saved the large US car industry from collapse with a large bailout package.)

New debt – or further later expansionary economic policy – was created through “monetary quantitative easing,” relying on a buy-in of private sector corporate debts to induce them to invest. The program worked to reverse the weak economic demand and expectations, and played a very strong role in the US economic recovery during the Obama years.

The European central bank was slow to react with this innovation probably because of the Greek debt problem of that period. Later, however, it followed monetary easing and helped the European economy also to strengthen back to growth.

When Trump was elected, he introduced a fiscal expansionary effort through tax reduction stimulus which re-energized an already rising economy. However, he also introduced other uncertainties with the initiation of a trade war with China and other countries, many of whom , US allies.

A behavioral assumption that we can deduce from the political movements in the US is this. Republican administrations want to expand the economy with fiscal measures using tax reductions, thus leading to large fiscal deficits. But they want to avoid spending increases. The tax reduction stimulus of the Trump government also produced the expansionary benefits that it had wanted. In effect, tax reduction raises the fiscal deficit too.

Democrats, in general, would try to raise the fiscal deficit with expenditure program increases. The politically independent Federal Reserve, however, can, as demonstrated by the Bernanke Fed and followed for sometime by his successor Janet Yellen, use expansionary monetary policy.

A good macroeconomic-driven balancing policy for growth and stability, however, is to use a combination of monetary and fiscal policy to create more demand when it is low (as in a recession or depression) and to slow down demand growth through the same cooperation of monetary and fiscal policy. A coordinated approach is ideal compared to one in which one policy compensates for inadequacy or overreach of the other.

This, the US government cannot pursue totally because of divided politics between the executive and the legislature. Luckily for them, they have created an independent institution that could do the job of correcting imbalances, but this is far from being an ideal policy.