Pull the Trigger

A GDP trigger is something that has an effect on the rate of GDP. Moreover, a trigger can be direct or indirect. For example, direct triggers are the four components of GDP: consumer spending, industry spending, government spending and net exports. An indirect trigger is something that has an effect on a direct trigger and might include such items as interest rates or bank lending standards.

The most important direct trigger is consumer spending. When consumers spend, businesses hire, production rises to meet demand and the economy grows. Then, as the unemployment rate falls, more wage earners enter the fray and economic expansion gains traction.

To combat our weakened economy, the Fed has been highly accommodative. The problem, however, is that consumers are not taking the bait to any large degree. In fact, much of this monetary explosion is sitting at various Federal Reserve banks and commercial banks. Even though the cost of borrowing is at historic lows, lending activity is weak. Individual loans at commercial banks are down from their April 2010 peak and real estate loans have been trending downward since May 2009. One bright spot may be found in the level of refinancing activity. As consumers trade in their higher interest loans for a new lower interest model, positive cash flow results, which may encourage additional spending.

After 20-plus years of accumulating debt leading up to the Great Recession, consumers remain overleveraged. Before robust spending can return, they must reduce their debt, build up savings and feel good about the economy and the direction of this country. Until then, adding more money to the system or maintaining historically low interest rates will have little effect. Even if consumers were well-positioned to resume their borrowing binge, lending standards remain tight. The days of fogging up a mirror to qualify for a loan are over.

The most important economic issue we face is weak consumer demand. If we can stimulate this everything else will fall in place—assuming Washington regains some measure of fiscal discipline. Therefore, the key question is, “How do you stimulate consumer demand?” Until this happens, unemployment will remain stubbornly high.

Dollar Daze

One of the most often tweaked indirect triggers is the value of the U.S. dollar. When the dollar weakens, U.S. exports rise unless global demand is extremely weak. Therefore, a weak dollar policy provides support for the large U.S. multinational exporting companies, which in turn boosts GDP, assuming exports exceed imports. If the goal is to support these large corporations, then a weak dollar policy is good bait.

Recently, the U.S. dollar has been strengthening, which is a headwind to net exports. Conversely, a strong dollar is also anti-inflationary, which is good for the consumer. Could this policy revive the deflation discussion? It’s possible, especially if global demand continues to weaken.

Government: A Growth Buster?

Government regulation is a powerful indirect trigger that can stimulate or stymie business growth. The more regulatory burden placed on business, the greater the headwind. Historically, regulation has ebbed and flowed. However, since 2008 it has increased rather substantially. Proper regulation necessitates a balance between law and grace. Too much regulation hinders business growth, while too little may promote the wrong behavior. Government regulation has been out of control for years. As a result, many companies have opted to relocate operations outside the U.S. where the business climate is friendlier. Moreover, employers are understandably concerned about the additional costs related to Obamacare, Dodd-Frank, etc. Potential tax increases are only adding fuel to the fire.

It’s no secret that our government has been on a spending binge over the past few years. Clearly, the benefit of all of this economic “stimulus” has been tepid at best. When government allocates resources it frequently lacks focus and efficiency. For example, the government bailed out several failing banks in 2008. Today, these same banks are saddled with additional regulatory burdens and excess fees. Also, when the U.S. government enters into global agreements, it’s often to the chagrin of U.S. companies. A good case in point is the Basel accords. Recently, Jamie Dimon, CEO of JPMorgan Chase called Basel III “anti-American.” Many believe Basel I and II were not much better.

This has created an atmosphere of uncertainty and is a chief reason why owners of small businesses are reluctant to hire.

The Global Influence

I certainly don’t need to remind you of the seriousness of the problems facing Europe. Why are Europe’s problems so important to our economy? First, Europe is a large consumer block and one of our most important trading partners. When their economy slows, we feel the effect. Second, the subprime contagion between our financial institutions and their banks is largely unknown.

The eurozone faces many challenges beyond the extreme indebtedness of its members. Although they are united on paper, unlike the United States, Europe has a fragmented fiscal policy. Under this structure, there is no central authority to enforce fiscal prudency. Therefore, if a country believes they will be bailed out if they get in trouble, they may be inclined to assume more risk. Additionally, their labor force is less mobile than here at home. It’s much more difficult to move from Italy to Ireland than from California to Connecticut. Each country also has its own legal system. Finally, there’s the issue of the language barrier.

Japan, another developed country, is in serious trouble. They are struggling with massive government debt, an aging population and the aftermath of devastating natural disasters. At well over 200%, Japan has the highest debt-to-GDP ratio of any nation. It’s going to take a lot of time and money to restore economic prominence.

With the developed economies in slowdown mode, the role of global growth rests on the shoulders of the emerging countries. Although these economies have experienced robust growth over the past several years, many are showing signs of slowing. Besides, even if the engines of the emerging economies were humming along, would it be enough to power the rest of the world?

Economic Levers

It’s important to understand that government does not produce or create. Government provides services for its people and can create an environment in which the private sector flourishes. Though we may debate the specific functions of government, when it comes to economic issues, the lines of demarcation are clear. Government has two primary levers with which they can stimulate an economy. These levers are monetary and fiscal policy.