Welcome to the Real Economy
Perhaps the most pleasant part of the recent turbulence in U.S. stock markets has been the welcome inaction of federal regulators. Volatility is back and who knows where stocks are headed next, but so far many government officials don’t see a need for their assistance. This is a welcome change after a decade dominated first by financial crisis and then by the federal response.
In our recent history Federal Reserve officials became famous for their “puts”—implied floors below which they would not allow stocks to fall. At least for the moment they seem convinced that the economy is strong enough to stand on its own. On Thursday the Journal reported:
So far, Fed officials have shrugged off the market’s woes and done nothing thus far to justify fears the central bank may raise rates more than the three increases officials projected back in December. Indeed, some in the Fed have appeared to welcome the stock market’s declines in a climate where central bankers were already viewing asset prices as elevated.
In an appearance Wednesday, [Federal Reserve Bank of New York President William] Dudley said “my outlook hasn’t changed because the stock market is a little bit lower than it was a few days ago. It’s still up sharply from where it was a year ago.” He added, “having a bump like this has virtually no consequence in my view to the economic outlook.”
…In his comments to Bloomberg, Mr. Dudley said the market selloff is in large part driven by market participants accepting the reality of a strong global economy and what that means for central banks… He described the degree of market selloff as “small potatoes.”
One irony of the current moment is that the Keynesians who presided over nearly a decade of secular stagnation are now worried that the economy is “overheating.” Then again, they said faster growth wasn’t possible, so they almost have to dismiss it.
A critical question even for non-Keynesians is whether the economy can thrive as interest rates head higher. History suggests that with the right incentives in place, the answer is yes. Back in the early 1980s interest rates were well into double digits. Over roughly a year beginning in the spring of 1983, the yield on the 10-year Treasury bond surged higher by three full percentage points–more than the entire yield such a bond offers today. But it wasn’t enough to dent the Reagan boom driven by deregulation and cuts in marginal tax rates. The economy grew 4.6% in 1983, 7.3% in 1984 and 4.2% in 1985.
Could robust growth happen again? The New York Times reported over the weekend on an important Trump deregulation effort: The Department of Justice has decided to enforce the law. This is a big policy change from the Obama era in which Justice enforced bureaucratic opinions about the law. According to the Times:
The Trump administration has adopted new limits on the use of “guidance documents” that federal agencies have issued on almost every conceivable subject, an action that could have sweeping implications for the government’s ability to sue companies accused of violations.
Guidance documents offer the government’s interpretation of laws, and often when individuals or companies face accusations of legal violations, what they have really violated are the guidance documents. Defense lawyers say the change in policy gives them a powerful tool to fend off allegations of wrongdoing against their clients.
It also advances a goal declared by President Trump in his first days in office: to reduce the burden and cost of federal rules and requirements. But consumer advocates say the move will crimp enforcement of crucial protections.
It is certainly true that enforcement is limited if federal officials are only allowed to enforce the law, rather than their personal preferences. According to a recent press release from the Department of Justice:
“Although guidance documents can be helpful in educating the public about already existing law, they do not have the binding force or effect of law and should not be used as a substitute for rulemaking,” Associate Attorney General Rachel Brand said. “Consistent with our duty to uphold the rule of law with fair notice and due process, this policy helps restore the appropriate role of guidance documents and avoids rulemaking by enforcement.”
It doesn’t take a skilled market forecaster to know that the rule of law will attract more investment than the rule of bureaucratic desire.