Woody Brock on Solving America's Fiscal Problems
Dr. Horace "Woody" Brock is the founder Strategic Economic Decisions, an economic research and consulting service. He earned his B.A., M.B.A., and M.S. from Harvard University, and his M.A. and Ph.D. from Princeton University). He was elected an Andrew Mellon Foundation Bicentennial Fellow in 1976. Dr. Brock studied under Kenneth J. Arrow, Professor of Economics, and John C. Harsanyi, Professor of Economics, University of California, Berkeley, both winners of the Nobel Prize in Economics. His recently published book, American Gridlock, is available on Amazon.com or via the link below. For more information, follow Dr. Brock on Twitter (@HWoodyBrock) and on Facebook (www.facebook.com/AmericanGridlock).
I spoke with Dr. Brock on February 14.
This is part one of the interview. Dr. Brock discusses trade relations with China and health care reform in part two, which will be published next week.
Your book contains a number of bold prescriptions for US policy makers, particularly with respect to fiscal policy. Before we talk about those, I would like to get a sense of how severe are the problems the US faces today. In your book you write this “time is different” with respect to the state of the economy and that the US faces the prospect of a lost decade. In what sense is this time different?
Let me be very precise, because this is a phrase that is easy to misuse. The first point is that at this stage of a recovery, our unemployment rate is far higher than ever before in history. Measured on the U-6 basis, it is 15.5%. The point is not simply that the recovery, in this sense, is a very bad one; it is that it is a slow recovery notwithstanding three years of 1% and lower interest rates and fiscal deficits double the level that could have caused most presidents to be impeached.
For these reasons, you could argue something is really wrong with macroeconomic policy. We are just not getting much bang for the buck.
Number two, a standard or Keynesian approach would say, “Well, let's just do more deficit spending.” That approach could work if animal spirits remain dead in the private sector. In that case, let's just have the government prime the pump even more, and to continue with 10% deficits. Why not 12%?
What's different this time is, for the first time in our history we have abused our welcome in the bond market. In Italy and elsewhere everyone said interest rates are fine at 3% and they won't go to 3.1%, they went to 7%. They may rise to 10%. They could go to 30%. If we go on borrowing and stimulating in a Keynesian manner, we will outstay our welcome in the bond market. That is why everybody is against deficits.
Finally, you have to look at the fact that it is different this time, because you and I and everyone else have been binge borrowing for 35 years. We have woken up and realized it is over. We must de-leverage. Likewise, during the Clinton 1995-2000 period, when the economy did extremely well, was that because of the Clinton tax policy? Not at all. What happened was an 8% of GDP increase in capital spending, which has only happened once before in the 20th century. That was the rewiring of America due to the telecommunications boom, and in particular Marc Andreessen's invention of the browser in November of 1994. That is a fact.
Unfortunately, you can't stimulate an economy like ours today by calling up to heaven and asking for another Industrial Revolution. They come at random, and they don't come very often. In those regards, the situation today is constrained and difficult.
How would the outcome be different if we pursue the smaller government fiscal policies that many are advocating, which some have called a “growth-through-austerity” approach?
The phrase growth-through-austerity is a contradiction in terms. Once again, if the private sector is stagnant or animal spirits are poor, as Keynes would put it, then if you have a contractionary fiscal policy of small measures, you are not going to drive the growth rate up nearly high enough.
There is something to understand in this. The average growth of the GDP in the 16 business cycles of the 20th century, for the first two and a half years of recovery was 6.4%, and before 1940 it was often much higher. In other words, you really rebounded. We need to grow at about 2.95% today just to hire the new kids coming out of school and to absorb new immigrants into the workforce, before we hire any of the millions who lost their jobs.
Our recovery has been at a 2% growth rate, when traditionally it would've been 6%. This is why small measures are going to have small results. It is just not enough.