Dilettante economist: I’m mulling this witches brew of Brexit, rates, and immigration

I’ve recently been made cognizant of this personality type that’s rilly, rilly wound up about what the Fed does with interest rates. But, I dunno… such that I think I’m newly cognizant of these guys, they resemble the old gold bugs.  I’m not sure they aren’t the same.

I think they have a better argument than the hard money people did though.  Far as I can tell it goes like this:

A necessary / mandatory component of “growth” is positive interest rates.  Easy enough, but we have central banking, and Fed won’t raise the benchmarks.  They say it’s because we have a structurally soft economy, but it’s actually because the government’s debt expense would be huge(er) with it accruing at real world rates.

Now, some of these guys have an inflation phobia that hasn’t come to pass, but I have some sense their finger on this Fed / rates thing is on the mark.  You got righty and lefty economists saying, hey increase the rates… fed won’t do it.  Why?  Is the economy really that soft?  I don’t think it is, not that soft here.

Anyway, they won’t raise rates, business still has to make money.  If business is not doing it easy in a commercial expansion in a growth environment, they’re doing it by imparting productivity.  The obvious way there is to reduce your labor input, and you do it by reducing the amount of man hours or by reducing the man hours’ cost.  Generally you steer away from reducing man hours…. You’d reduce output and then have no product.  So what’s sought almost universally is a way to reduce your labor cost.

These Brits were pissed about a lot of things.  Such that it was ‘migrants’, it wasn’t primarily ‘refugees’ they objected to.  It was Poles and Serbians let in by EU rights to migrate, that were taking jobs from native Brits:  http://www.vox.com/2016/6/22/11992106/brexit-arguments

So its trade, right, a globalism thing as much as the trade agreements.  Cept you can bring in cheap labor instead of cheap products.  We’re having that discussion here in the US

I don’t know where I was going to end up with this, narratively, but its Trumpian, basically:  this business of undercutting native labor rates to keep commerce chugging along in a no growth environment is a sop to the 1%.   Here, Democrats are way, way complicit in that.  You’d just not think that would remain tenable.  Maybe it won’t.

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One thought on “Dilettante economist: I’m mulling this witches brew of Brexit, rates, and immigration

  1. pm1956

    Well, I’d beg to differ on a couple of those things.

    I do like your analogy about interest rates and gold bugs. Mostly the people who are clamoring for higher rates seem to me to fall into 2 camps: those who have self interest at heart and can’t seem to figure out how to invest without a safe, risk free, assured 3 percent return; and those who are worried about the next recession, and can’t imagine how we will fix it unless we can cut interest rates (and you can’t do that unless the interest rates are significantly higher than zero).

    Basically, what I am saying is that they suffer from a failure of imagination. They can’t imagine how the world economy works, or that Samuelson’s basic text from the 1980’s does not describe everything in the world. This is why I llike your gold analogy–some people think that Gold is a central tool in economists toolkits, whereas in reality it is just sort of a scarce commodity whose price changes based on supply and demand, and much of the demand is manufactured from fear, or advertising (sort of like diamonds–there really aren’t very many of them, but there really isn’t much use for diamonds, either–just as jewelry, which means thaat the demand is fickle, and could dissappear as soon as people don’t care about jewelry anymore. Similarly, there really is not a lot of use for gold–except to hoard it under a mattress).

    Part of the problem is understanding the difference between cause and effect. positive interest rates do not cause (or are necessary for) growth. often, however, positive interest rates are a result of growth. Interest rates are simply a measurement of demand for capital. as the demand for capital goes up, it becomes scarce, and people can charge more for it (interest rates are the cost of capital–what you pay in order to borrow capital). higher demand for capital is a good thing, because it generally means that people are using capital, or (hopefully) investing it in building or creating things (they could also be speculating, which isn’t so good, which also drives up the demand for capital, and drives up interest rates).

    The problem is that if you drive up interest rates (via edict of the central bank, the Fed), you do not increase the demand for capital, you will reduce the demand for capital, because you are increasing the cost of capital (making it more expensive). The only way to increase the demand for something is to either lower the price (in this case to reduce interest rates), or to invent/create other, new uses for the item (increase the items utility).

    Inflation, particularly wage inflation, is also a critical aspect of this situation. Basically, wage inflation in the US has been near zero. this is a critical forecasting tool for economists, as it is onoe of the most reliable measurements of demand for labor. Employment numbers are not considered to be as good a measure, because they fluctuate and don’t capture a lot–discouraged workers, people who have moved out of the formal labor force, the underground economy, etc. All of that is, however, captured in wage inflation, which measures the overall demand for labor by watching the price for labor (what you have to pay to get it). If wages are going up, that means that labor is scarce, which means that there is more economic activity in the economy–more people are working.

    But wage inflation is low, which says that demand for labor is low, which says that the economy is still soft, overall. Raising interest rates would make things a lot worse.

    On the Brexit thing–I don’t think you have it right. The Brits have one of the best employment situations in the EU. I think it was more a feeling of not liking foreigners as opposed to fear of job losses. Now those things are sort of related, but not the same. The fear of job losses is more irrational, less based in reality. But in reality there are a lot more foreigners in Britain as a result of EU membership. And I think that much the same dynamic is at play in the US, and with Trump supporters. And people generally do not like change, especially as they get older (and if it comes with a percieved loss of power/influence, then they feel threatened). Hence the fact that most of Trump’s support comes from old white men, many of whom would have been Democrats a few years ago (and probably voted for bill Clinton).

    Reply

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