Monday, February 9, 2015

All Systems "Go"? The Growth Checklist

There's a lingering question, which needs better answers than has been the case thus far. "Why?" The Fed has been anxious (patient?) for quite some time, to begin normalization procedures for monetary policy "liftoff". Some aspects of their checklist appear to be in good shape, but what about the parts that are not? Maybe it's not possible to complete the checklist because...well who really knows why. Plenty of "black boxes" have been "recovered" over the years and discussed at length, whenever monetary policy "crashed and burned".  Of course, economists and other onlookers have different crisis theories - possibly even different "checklists", for that matter. That's the problem - no one really knows for sure.

And complex systems can in fact fail, when certain components are left off the checklist. What about standard Fed procedures which - until the Great Recession - were taken for granted? For instance, it had become clear that a nominal target level could provide monetary stability. Why did this fact lose its importance? Atul Gawande, in "The Checklist Manifesto", wrote:
Faulty memory and distraction are a particular danger in what engineers call all-or-nothing processes. Whether running to the store to buy ingredients for a cake, preparing an airplane for takeoff, or evaluating a sick person in the hospital, if you miss just one key thing, you might as well not have made the effort at all.
Argh. Hands off the interest rate just now, please. Gawande continues:
A further difficulty, just as insidious, is that people can lull themselves into skipping steps even when they remember them. In complex processes after all, certain steps don't always matter. ..."This has never been a problem before," people say. Until one day it is.
Why is the Fed anxious to "resume altitude" at a lower trajectory? Like the proverbial rock and a hard place, the Fed appears caught between Washington's desire for normal economic circumstance, and the marketplace which senses the wishful thinking that is actually involved. As David Wessel states, "The markets don't appear to believe the Fed."

Did the earlier growth trajectory die a horrible death, or is it just temporarily missing? After all, no one explained whether it was permanently abandoned. Consequently, any present "normalization" doesn't have a good reference point, and what policy makers want is not at all clear. One gets the impression that divergence from the earlier output gap isn't "supposed" to matter. Or if divergence is discussed as though it does matter, the discussion quickly devolves into debate whether output should be regained on fiscal or monetary terms. Somehow the fact that fiscal activity follows monetary activity, is now lost in translation.

In spite of these concerns, Washington would like to keep economic circumstance essentially as they are. Thus far, policy makers seek a twentieth century repeat on slightly subdued terms, if only because there is little common vision for the twenty-first. Once production dispersed around the globe, developed nations sought growth that was based on the "more is better" approach. In other words, they raised the bar in terms of how production and consumption were "supposed" to take place. While that meant leaving some out of the game, for a long time it didn't seem to matter. Now, more participation is needed in the marketplace, even if only to help government maintain the safety net already in if that were the only concern!

But how to bring back the ones who have fallen by the wayside? Demographic and related arguments for a smaller labor force participation rate, do little justice to the fact world population is still increasing, and home production hasn't been a major economic contributor for decades. New and more inclusive growth is not easy, because it means reforms which would also change the nature of supply side structure in legal and financial terms. In the meantime, "all or nothing" terms for economic inclusion appear as though tottering on the edge of inflation or deflation, depending on the way the "wind blows". Financial aspects of this "dilemma" are particularly dubious. The idea of permanent instability is reminiscent of a parent bird running ahead of the observer on the ground, pretending to have a broken wing, all the while drawing one's attention away from the nest egg.

One can only hope that when the Fed addresses normalization procedures in the future, money enough will have been printed for what is at stake. Too much "uncertainty" has been needlessly self imposed, while populations are led to believe that growth can magically materialize without the monetary backing necessary to sustain it. At the very least, public officials need to be honest about what is happening, because too much false hope continues to be spread about recovery. No one can afford to bypass low labor force participation, as though it were merely an insignificant factor of the growth checklist. Plenty of marketplace factors reflect this reality, and this is no time to pretend otherwise.

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