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PeakTrader:

The Fed has done an increasingly better job smoothing-out business cycles over the past hundred years, to facilitate growth, particularly since we’re no longer constrained by the gold standard.

The problem hasn’t been the Fed, although Bernanke had to prove he wasn’t an inflation dove, which caused the recession, in 2007, initially.

However, we were on the path to a mild recession, with the help of the Bush tax cut in early 2008, which gave the Fed time to catch-up easing the money supply, until Lehman failed in Sep 2008, which caused the economy to fall off a cliff.

It’s uncertain if even economists have the wisdom to micromanage a large, diversified, and dynamic economy. However, economists have proven they can manage, or direct, the economy effectively in a crude way.

From Commanding Heights:

“Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself.

Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.

…fiscal policy — spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment.

As a corollary, the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked.”

The problem has been fiscal policy, and other economic policies, controlled by politicians. Perhaps, fiscal policy, and major economic policies, should be managed by economists.

Those policies created an expensive “recovery,” because one foot has been on the brake and the other foot has been on the accelerator.

Yellen and Fisher are excellent choices. They’ll continue to direct the economy in a general way as the Bernanke Fed.

Here’s what Bob Brinker said about the Fed (Dec 2012):

“It’s only because the Federal Reserve has been active that we have any growth at all in the economy….The Federal Reserve is the only operation in Washington doing its job.

The only person that would criticize Ben Bernanke would be a person who is so clueless about monetary policy and (the) role of the Federal Reserve as to have nothing better than the lowest possible education on the subject of economics….Anybody going after Ben Bernanke is a certified, documented fool….”

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I think, there’ve been at least four general factors that promoted faster economic growth:

1. The Federal Reserve in smoothing-out both long-wave and short-term business cycles. Economic boom/bust cycles are inefficient both in the boom and bust phases, because of periods of strain and slack.

2. Fiscal policy or Keynesian economics, which also helped smooth-out business cycles.

Average annual per capita real GDP growth:

1913-2012: 2.04% (after Fed)
1813-1912: 1.38% (before Fed)
1936-2012: 2.38% (after Keynes General Theory)

Source: Census data and the BEA.

3. Since the minimum wage was established, per capita real GDP has grown at a much faster rate.

Average annual per capita real GDP growth:

1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%

Source: Census data and the BEA.

4. Globalization, i.e. open markets, free trade, and unrestricted capital flows, which improved U.S. living standards at a much faster rate (although U.S. trade deficits, since roughly 1980, subtract from U.S. per capita real GDP growth and add to our trading partner’s per capita real GDP growth).

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Lyle, from 1875-1900, annualized real GDP growth was 4.50%, annualized per capita real GDP growth was 2.37%, and annualized population growth was 2.08%.

From 1975-2000, for example, annualized real GDP growth was 3.45%, annualized per capita real GDP growth was 2.35%, and annualized population growth was 1.08%.

It should be noted, there was a long-wave bust cycle from 1973-82 (which included three recessions – two severe and one moderate – in a period of inflation). Annualized per capita real GDP growth from 1973-82 was 0.99%.

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Annualized per capita real GDP growth from 1929-1938, another long-wave bust cycle, was -0.49% (i.e. negative 0.49%).

Also, there was the Long Depression from 1873-1879. However, annualized per capita real GDP growth was 1.96% from 1873-79.

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Mike, you make no sense.

The Fed creates and destroys money to achieve sustainable growth (of goods & services), which is optimal growth. Money is just a tool to achieve that goal.

You can praise the Fed later.

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Yes, the U.S. Industrial Revolution, from 1871-1914, was one of the greatest eras of prosperity.

However, there were frequent and severe economic boom/bust cycles, demand, or mass consumption, was weak, compared to after WWII (causing deflationary growth and slowing improvements in living standards for the masses), and there were more barriers to trade (e.g. tariffs, quotas, and other restrictions).

The height of the U.S. Information Revolution, from 1982-2007, was a greater era of prosperity. As a result, living standards, labor standards (or working conditions), and environmental standards were much higher in the 2000s compared to the 1970s.

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Growth could’ve been stronger in the Industrial Revolution.

Here’s part of a Bill Gross interview in Jan ’07 about a Keynesian idea “animal spirits:”

Bloomberg’s Tom Keene: “…As you know, I’m a big fan of nominal GDP – this, folks, is real GDP plus inflation. It’s the ‘animal spirits’ that’s out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that’s going to end?”

Pimco’s Bill Gross: “…Ultimately, the inflation component affects the real growth component. To the extent that you have nominal GDP – in my forecast 3 to 3.5%, that’s really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining assets prices ultimately factor into eventually lower real growth. But that’s not for mid-2007 but perhaps for later in the year.”

Tom Keene: “When we look at six months of low nominal GDP, is that enough to link directly into the ‘animal spirits” of the business investment component of GDP – the “animal spirits” of business men and women?”

Bill Gross: “Well sure it is. When you realize that the average cost of debt in the bond market – and therefore in the economy and this includes mortgages – it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications.

When you go back to 1965, Merrill [Lynch] did this study – in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well.

The question becomes why hasn’t that happened yet, and I think we’re simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy.”

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Here’s what one economist said in 2012:

“The decline and lackluster recovery in business investment has a wide range of causes, including globalization, regulatory barriers, and weak demand.

Many companies are investing overseas rather than in the United States. Multiple layers of regulation, even if well-intentioned, have the impact of discouraging capital investment and innovation. And the continued weakness in demand at home makes it difficult to justify building new factories.

Government has to invest in infrastructure, education, and research. Households have to invest in their own human capital. And businesses have to invest in buildings, equipment, and software.”

He also wrote this article in 2006 “Why The Economy Is A Lot Stronger Than You Think:”

http://www.businessweek.com/stories/2006-02-12/why-the-economy-is-a-lot-stronger-than-you-think

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Beene:

The fact remains the deregulatory position of the Fed since 1970s has brought the Nation to the position of the greatest debtor in the world; as opposed to before deregulation being the greatest creditor Nation in the world.

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PeakTrader:

Beene, globalization has allowed the U.S. to consume more than produce, up to $800 billion a year, in the global economy and in the long-run.

The U.S. offshored low-end manufacturing, imported those goods at lower prices and higher profits, and shifted limited resources into high-end manufacturing and emerging industries.

Also, I stated before:

…the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.

Here’s an article by the Fed:

Income Flows from U.S. Foreign Assets and Liabilities
Federal Reserve Bank of New York
November 14, 2012

Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of -$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad.

As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals’ foreign operations and other corporate claims earning a much higher rate of return.

U.S. investors earned a much higher rate of return on multinationals’ foreign operations and similar corporate holdings than did foreign investors here, 10.7 percent versus 5.8 percent, respectively.

The superior U.S. rate of return on FDI, as well as the greater tilt in U.S. foreign investments toward FDI, accounts for the $322 billion income surplus recorded in this category in 2011…The United States has earned a substantial premium on FDI investments at least since the 1960s.

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Moreover, I may add, because the U.S. shifted from low-end manufacturing into high-end manufacturing and emerging industries, the U.S. has much more market power than its trading partners.

The U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit).

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