Imagine a baseball team on which all batters must wear a patch over one eye, all pitchers must throw with their opposite hand, all baserunners must hop rather than run and all fielders must wear their gloves backward.
Economist Ken Mayland, president of ClearView Economics, used that analogy during an Oct. 23 presentation in Toledo to illustrate how the recovery of the U.S. economy has been hampered by bad policies.
“How would you expect that economy to perform? You’d probably say it’s going to underperform what its true potential is,” Mayland said. “Bad policymaking is hobbling business and tampering growth. If the policies don’t change, why would you expect the results to change?”
Mayland, who spoke at KeyBank’s annual economic forecast breakfast at The Toledo Club, has spent more than 35 years studying the business cycle and is one of the nation’s leading experts in economic forecasting.
During his presentation, “What Emerging Data Reveals About America’s Future,” Mayland reviewed economic events of the past 70 years and explained what they can teach us about our present economic situation.
“If you line up the current tracking of this economic recession and recovery to date with the tracking of the four previous recession episodes — two of which were mild recessions and two of which were very deep — it’s quite apparent we are severely underperforming any kind of recovery we’ve seen in the past,” Mayland said.
Economic recovery has been slow because of poor government leadership under multiple administrations, especially on regulatory policies for housing, energy, taxing and spending, health care, labor relations, the environment and more, Mayland said.
“It’s the whole panoply of government policies that’s creating all kinds of stumbling blocks and drags to growth,” Mayland said. “We are still living with the legacies of bad policies of the past; that’s constraining growth today.”
Traditional fiscal policy levers have been “maxed out” and are no longer effective, Mayland said. The key now is sensible regulation, not oppressive regulation.
“These regulations have created a great deal of uncertainty about the future and they are clearly increasing costs, and those are [job] killers,” Mayland said. “I would roll back Sarbanes-Oxley, Dodd-Frank, regulations that create a lot of spinning of the wheels, a lot of compliance cost, but produce very little good for the country.”
Mayland said he also disagrees with the Federal Reserve keeping the interest rate at zero and adding monthly mortgage securities.
“We’re punishing savers, people trying to do the right thing,” Mayland said. “We are rewarding them with zero, or near-zero returns. When we count in inflation, we are giving them losses of purchasing power. It’s counterproductive.”
Mayland also advocated energy independence and implementing a flat tax system.
This year’s presidential race is one of the most divisive and critical in recent memory, Mayland said.
“I don’t know of any election where the differences were so starkly different as this,” he said. “We’re going to go one path or another.”
Historically, if economic growth exceeds 3 percent in the year preceding a presidential election, the incumbent or incumbent party has won, Mayland said.
“This economy ahead of this election will not come close to 3 percent growth,” Mayland said. “If the economy has a vote — and this has been a very strong pattern in past presidential elections — Obama is going to have a very tough road of it for his re-election bid.”
To lay the framework for his conclusions, Mayland reviewed the U.S. economic situation of each decade, starting at the end of World War II, from which the U.S. emerged with “an enormous amount” of debt, nearly 25 percent of the gross domestic product (GDP). Deficit accumulations raised the debt-to-GDP ratio to about 120 percent, higher than it is today, but by 1960, the ratio was down to 60 percent, Mayland said.
“Which raises the question, ‘How’d you do that? How’d you fix that situation?’ Obviously that question has relevance to the deficit and debt situation today,” Mayland said.
The ratio was not reduced by creating surpluses, although there were a few surplus years in the 1950s, Mayland said. The more important factors were maintaining “not spectacular, but good, solid growth” of 3.3 percent per year on average during the 1950s and keeping the growth of federal spending to under 4 percent per year, Mayland said.
“The lesson to be drawn from this period — and, by the way, we did exactly the same thing over the course of the ’90s — is the way to remedy big deficits is with good economic growth, austerity, discipline and patience,” Mayland said. “Put that policy into place, let it run and, over time, you will fix the problem.”
The 1960s were largely prosperous, with nearly full employment by the end of the decade, but then Vietnam War buildup and defense spending put pressure on the economy, Mayland said.
The inflation rate rose from 1 percent to 5 percent, prompting President Richard Nixon to implement wage and price controls — which never work, Mayland said. In 1973, the U.S. was blindsided by the tripling of oil prices. That pressure, along with the stress of coming off wage and price controls, drove the inflation rate to 12 percent.
“There was a kind of smugness in the economics community that, boy, we did such a good job managing the economy in the ‘60s, we can tweak the economy, pull the levers,” Mayland said. “There was a sense that we can squeeze a little more growth out of this economy by being willing to accept a little bit higher inflation. … What we ultimately found was there is no long-term trade-off between growth and inflation. When you try to put these measures in place, all you ultimately get is higher inflation.”
As inflation rates continued to rise, confidence in the economy dropped, measured by a steep decline in the value of the dollar and the rise of interest rates.
“When that prime rate was 21.5 percent, you had no sense that the rate was going to stop there,” Mayland said. “Is it going to be 30 percent next quarter, next year? There was really a loss of confidence and some real fear about the economy.”
Paul Volcker, chairman of the Federal Reserve from 1979-87, resolved the inflation problem by “clamping down on the money supply,” which contributed to high interest rates in the short term, but dropped inflation to below 4 percent by the early 1980s, Mayland said.
“He accomplished what he achieved, but with great pain,” Mayland said. “We went through two recessions over that period and we saw the unemployment rate rise ultimately in 1982 to 10.8 percent, which is higher than the unemployment rate rose in this most recent episode of recession. On top of that we suffered from sky-high inflation rates and sky-high interest rates, so there’s a case that this period was just as bad as what we recently experienced.”
Today, the U.S. is experiencing a poor economy along with “eye-popping deficits,” Mayland said.
“We’ve now seen nine of 10 quarters come in under 3 percent growth, which is the average growth rate we’ve seen over the last 50 or 60 years,” Mayland said.
Consumer spending comprises 70 percent of the economy, but growth in disposable income, the main driver for consumer spending, has been slow and people don’t have money to spend, Mayland said. Jobs are being recovered, but at a slower rate than Mayland feels is acceptable. Wage growth has been under 2 percent while the inflation rate is 2 percent or more.
“Wage growth is not even covering the loss of purchasing power due to inflation,” Mayland said. “How can you expect consumer spending to grow? When you understand that arithmetic, you can see why the growth of the economy is constrained.”
Good companies will always find a way to survive, if not thrive, Mayland said. Segments of the economy that are recovering well include the auto industry, the aerospace industry and the fuel drilling industry, all of which impact Ohio, he said.
Mayland also briefly addressed the economic situation in Greece and Spain, which is calm for the moment, but he doesn’t expect that to last.
“We’re going to see more problems come out of Europe and when we do they are going to rock the financial markets,” Mayland said. “We can’t control what’s going on in Europe. The only question is, can we do something with creating good policies here in this country to help us decouple from them? In other words, create such a strong dynamic here that it doesn’t matter so much what’s going on in Europe.”
Mayland said he is ultimately optimistic about the U.S. economic recovery.
“Is this sluggish growth, this 2 percent growth, the new normal for our economy?” Mayland said. “I refuse to accept that.”
Jim Hoffman, president of KeyBank’s Michigan/Northwest Ohio district, said Mayland’s presentation was insightful.
“It just helps everyone focus on how important this election is going to be and probably the different paths our economy can follow based on the election,” Hoffman said. “The other thing I thought it did is it focused on the steady but very slow growth that we’re having in our economy, and that’s why people are not feeling like things are very robust. It’s not bad; it’s just not good enough for people to really thrive.”