The American Economic Association has been meeting this week, and has not done much to clear up the outlook for the U.S. and global economies, it seems.
For example, the U.S. and the euro area face “daunting economic challenges” in a world of low inflation and interest rates and central banks alone don’t have the tools to cope, according to former European Central Bank President Mario Draghi and ex-Federal Reserve Chair Janet Yellen.
“I believe that for the euro area there is some risk of Japanification but it is by no means a foregone conclusion” if it acts comprehensively to avoid a deflationary malaise, Draghi said via a video link to the conference in San Diego. “The euro area still has space to do this, but time is not infinite,” he added.
Yellen, now at the Brookings Institution in Washington, said she agreed with former Treasury Secretary Lawrence Summers that the U.S. was enmeshed in “secular stagnation” — a state where desired savings are bigger than investment and interest rates are depressed as a result, Bloomberg said.
Yellen ticked off a number of structural forces holding down interest rates--including an aging population and sluggish productivity--and suggested they might be around for a while. “These factors are apt to prove chronic by nature,” she said.
Draghi took euro area governments to task for working at cross purposes with the ECB’s efforts to aid the economy in recent years by pursuing restrictive fiscal policies. “This is why the ECB has been consistently calling for fiscal policy to play a stronger role and capitalize” on the low rates, he said.
He counseled policy makers in Europe against becoming resigned to slipping into deflation. “It is certainly not too late for the euro area to avoid this,” he said, adding, “The euro area is not in a deflationary trap.”
Yellen said that monetary policy in the U.S. should not be written off as a policy tool to combat recessions just because interest rates are so low. She agreed with her predecessor, Ben Bernanke, that quantitative easing and forward interest-rate guidance can be effective in providing stimulus to the economy.
But while “monetary policy has a meaningful role to play, it’s unlikely to be sufficient in the years ahead,” Yellen said. It “should not be the only game in town.”
“We can afford to increase federal spending and cut taxes” to support the economy in a recession even though government debt has risen sharply in recent years, the former policy maker said.
Yellen did, though, express concern about financial stability risks arising out of an extended period of low interest rates. She also bemoaned the paucity of macro-prudential tools the U.S. has to deal with that.
In the meantime, Bloomberg also highlighted the results of an evaluation by the U.S. Chamber of Commerce that said that the ongoing trade wars threaten negative impacts for numerous U.S. states. The Chamber warned that American businesses and consumers are “bearing the brunt of the trade war” and called on the administration to change course.
Crunching Commerce Department data, it concludes that more than half of U.S. states are facing retaliatory tariffs on at least 25% of their exports to the European Union and China. The report lumps together impacts for consumers and exporters, and is likely aimed at administration assertions that exporting countries bear the brunt of tariffs, many of which actually are paid by U.S. consumers.
In the meantime, the sudden shift in focus in Washington from the economy and global trade prospects to tensions with Iran, together with the impeachment process, has the potential to change the tone and perhaps the process itself.
So, we will see. The administration is pushing ahead on several fronts, including current and hoped for trade talks — but prospects of war may change a great deal and should be watched closely as the national debates continue, Washington Insider believes.
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