Higher Interest Rate Necessary

Last week I asked whether or not the Federal Reserve should raise interest rates. I did not answer the question, suggesting instead that the reasons for higher interest rates put forward in media - namely that our economy is doing better than expected - are actually not accurate. I pointed to weak growth in GDP and consumption, to a stagnant job market and to clearly weakening business investments. I especially pointed to the sharp decline in business investments in structures and equipment. Both of these variable indicate that our businesses have excess capacity, indicating production is at a peak for this business cycle.

I still maintain, though, that the Federal Reserve should raise interest rates. There are, primarily, four reasons for this. 

Should the Fed Raise Interest Rates?

The eternal question "Is the Fed going to raise interest rates?" was asked again in the Wall Street Journal on Wednesday. In a piece stretching across most of page A2 the Journal predicts one or two interest rate increases over the next six months:

Many [Federal Reserve] officials have said they can be patient before raising rates again, meaning a July move is highly unlikely. But new rounds of strong economic data - particularly on hiring or on an uptick in inflation - could increase their sense of urgency in the months after their next meeting. Atlanta Fed President Dennis Lockhart, a centrist at the central bank whose views often represent a middle ground among officials, told reporters last week it remains likely that the Fed will raise interest rates this year, adding "I wouldn't rule out as many as two" increases.

An interest rate hike has been in the making for quite a while now, almost since Janet Yellen succeeded Bernanke in 2014. It is needed, but not for the reasons alluded to by the Wall Street Journal. 

There are several reasons to be skeptical of the "strong economic data" argument.

Thoughtless Regulations Jeopardize Car Buyers

The car industry is one of the most regulated parts of our economy, especially when it comes to the design and performance of the final product. For this reason, the car industry is also an excellent place to study the negative effects of government regulations. 

At the forefront of government incursions into the manufacturing, sale and consumption of motor vehicles is the political desire to reduce emissions of, primarily, carbon dioxide. To bring the industry into compliance with political emissions demands, the federal government imposes gradually tighter mileage standards. In response, car manufacturers have to put more and more of their resources toward finding new ways to meet these standards. 

Since the miles-per-gallon standards are strictly political and do not take into consideration other objectives with car manufacturing, one should not be surprised to find that car manufacturers are ready to cut corners to meet those standards. We have all heard about Volkswagen's systematic cheating with mileage numbers for its turbo diesel engines; today we can report three more scandals that belong in the line behind the VW scandal.

First out is another diesel engine story, one that will not affect U.S. car buyers:

Weak GDP Keeps Oil Prices Down

The decline in oil prices has been anywhere from tough to catastrophic for states relying on severance taxes for their budgets. Alaska has taken a brutal beating and is on the brink of bankruptcy. North Dakota has experienced one of the largest contractions in GDP any state has seen in recent memory, shrinking the tax base as well.

Wyoming is having a slightly different experience, with a lighter dependency on oil than Alaska but a coal production that at its peak made Wyoming the world's second largest coal producer. The combination of gradually tighter regulations on coal, a global drop in energy demand thanks to recessions in Europe, China and Japan, and on top of that depressed oil prices has been a death-by-a-thousand blows experience for the Cowboy State.

In all the states where severance-tax revenue has declined substantially there are political wishing wells where legislators go to find a glimmer of hope that the good old severance-tax days are going to come back. Some of them think that the recent rebound in oil prices is only the beginning. 

Some media stories seem to reinforce that hope. For example, according to CNN Money:

New Entitlement Bigger than Social Security

With the federal debt exceeding GDP, a predictable return to trillion-dollar deficits and two credit downgrades, the last thing Congress should do is expand the welfare state in the United States. Yet that is exactly what Hillary Clinton hopes they will do if she is elected president in November. It is her ambition to add three new, major entitlement programs to the American welfare state. 

One of her new programs is a federal paid-family-leave program, also known as general income security. Nobody should be surprised at this: as I explained in my 2010 book Remaking America, Democrats in Congress have been pushing for general income security programs for many years. 

To find out what a federal paid-leave program might look like and what it would cost, it is a good idea to study the state-level programs that are popping up around the country. The best study object is the federal pilot program in the District of Columbia, which, if implemented at the federal level, would cost American taxpayers more than Social Security.

Completing the American Welfare State, Part 2

Yesterday I discussed one of Hillary Clinton's three welfare-state reforms, namely a federal paid-family-leave entitlement program. I used the recently-created program in New York as an example. I explained how enormously under-funded that program is. 

New York is not the only state enacting or considering a paid-leave program. With the threat of a federal program it is important to explore the state-level models already enacted or being considered. Emphasis should first and foremost be on the fiscal side of these programs, a side that seems to go completely unnoticed in the national debate.

Perhaps the most important example of a paid-leave entitlement is the pilot program in the District of Columbia. Sponsored by the U.S. Department of Labor, the program has "enthusiastic support from the Obama administration". Back in October 2015 the National Law Review presented the program:

Completing the American Welfare State, Part 1

While the public conversation is centered around Secretary Clinton's e-mails, no attention is being paid to what kind of welfare-state reforms she would like to impose on the United States. It may be worth keeping in mind that she was the ideological driving force behind President Clinton's attempt at single-payer reform in 1993 - the reform earned the "Hillarycare" nickname for a reason - and as recently as in May this year she declared that she once again wants the American people to accept single-payer idea. 

She is also a champion of general income security programs - known to Americans as "paid family leave" programs - and government-provided universal pre-school programs for all children in the country.

Privatizing the Regulation State

The American welfare state differs from its European counterpart in two ways: it still lacks a couple of major entitlement systems that have tipped European economies over the edge into perennial economic stagnation; and government's regulatory incursions into the economy are in some instances even worse here than in Europe. 

There are exceptional instances when market regulation can actually preserve the free market itself, such as to shield entrepreneurs and consumers from the destructive consequences of predatory capitalism. History is full of examples of how private businesses have used their might to drive competitors out of the market, for example by means of below-cost pricing, vertical integration to control key production inputs, etc. However, those examples do not dominate the history of capitalism and the free market - far from it - but they do remind us that the protection of economic freedom is an ongoing process, even when government is no longer its adversary.