Last week, the House Financial Services Committee held hearings on Federal Reserve reform. Maybe the Fed could explicitly follow monetary policy rules, or become subject to conventional audits, or be the subject of a commission reflecting on its hundred-and-one years of performance. These were some of the ideas floated. Warhorses including the old International Monetary Fund hand Simon Johnson were there to say no way: everything will go haywire if you change a thing with the Fed.
Sure, Professor Johnson. Rules, for example. These could turn out to be scary. Back when the Fed had to think about things like gold-cover ratios, all the economy had to show for it was postwar prosperity after World War II, the most legendary experience of economic abundance the world has ever seen.
In the lexicon of economics, there is a useful little word that can help us get a grip on why the Fed, and monetary policy in general, could use a dose of humble reform in this millennium of sub-2% growth and economic malaise, a condition we thought had gone moribund with the 1970s. That word is “real.”
There is all sorts of economic activity out there, a panoply of it. Anything involving making or spending a buck, you might even say of making life better, is economic activity. Conventionally, we speak of two major sectors in the economy, the private and the public. Further terminology speaks, respectively, of the real and the non-real sectors.
The real sector is the private economy, that complex that produces all those goods and services that people need and want. Government product (if there is such a thing in truth) is in turn akin to consumption, something that one does with excess real production. Government output is non-real, private output is real.
In the classical expression, the real economy is Gross Domestic Product minus one component, government spending. “Ex-government GDP” is the term people use when identifying the output of the real economy.
Needless to say, this statistic has been sickly the entire 2000s, though it has shown signs of life since 2011, when the vogue for stimulus in Washington somehow started to wane.
But GDP, even ex-government GDP, is a distraction. This becomes clear in consideration of another use of the term “real” in economics. Real are those private transactions that result in material gain for people in terms of a final good or service. A part for the car gets delivered, food gets grown for market, mother puts daughter’s hair in a do. Final things that one wants, one gets. All real.
Non-real are those transactions that are undertaken to hedge the possibilities of failure in real transactions. Put options on oil when a refiner contracts a shipment, insurance, a suitcase costing $50 in luggage fees for warm clothing never used on a trip. All non-real, hedging the possibilities in case what one strives to procure falls through.
Generally, real transactions dwarf non-real transactions of this sort. Non-real transactions of the hedging variety amount to a small fraction of the price of real goods, in normal settings, and serve to stabilize the general level of prosperity and enable risk-taking.
But then there are the settings in which the two kinds of non-real economic activity team up—indeed gang up on the real. This is when the government gets big and activist, and one has to hedge one’s own real economic activity so as to take into account government capriciousness, pretentiousness, waste, and mistakes. Which is to say the near entirety of any government activity.
The greatest example offered by modern history in this regard surely is monetary policy itself. Since 1971, when the United States fully went off the gold standard (that last vestige of monetary “rules”), all sorts of economic activity—in the private sector no less—have been dedicated to hedging the dollar and the Fed and the caprice of the United States.
To name a few: There has been foreign-exchange hedging to an enormous degree in the currency markets (now the largest in the world, exceeding the value of stock markets). There has arisen a whole new profession, that of financial planning, now that it is not so obvious how to save money given that the dollar regularly devalues. And there has been a boom in government debt (thanks to dispensing with those gold rules), which has facilitated the flow of wealth from the real to the non-real sector.
How to measure the rise of the non-real over the last generation and a half, both the upsurge in hedging and the rise of government? In the 1970s, the intrepid forecaster John Rutledge calculated that the effect of government-induced stagflation was to flip the national balance sheet by about ten points. Where pre-stagflation, Americans held 55% of their assets in non-tangible forms, and 45% in tangible, that ratio reversed after 1971, because tangible assets kept pace with inflation better. Before, people owned titles to businesses, which is to say dollar flows. Come stagflation, they got out of that in favor of old washing machines and objets d’art.
Another effect occurred in the financial sector of the economy. It increased by fourfold as a percentage of GDP, from about 3% to 12% as dollar capriciousness got entrenched. That extra 9% conceivably represents little more than fundamentally unnecessary economic activity.
One can imagine that had the gold standard been maintained in decent form through the 1970s and beyond, the boom in the non-real of both varieties—hedging and government output—would have never happened. Thus all the output claimed over these years by the extra hedging and governmental activity would have accrued to the real economy.
We would all have been much richer, with a good share of the extra output going to the disfavored classes, in that by definition the poor are worse at hedging than the affluent. This is not to mention the investment that would have occurred from the extra real output, leading to an exponential increase in output (and working-class wages) in the future. It is reasonable to guess that we would be a third, a half richer today, maybe twice as rich, had we never courted the boom in the non-real sectors.
W styczniu 2020 roku Wielka Brytania formalnie opuściła Unię Europejską. Oczekiwane korzyści z brexitu, poza odzyskaniem suwerenności w zakresie kształtowania prawa i zewnętrznych relacji gospodarczych, jednak się nie zmaterializowały. Widoczny jest natomiast spadek wydajności i konkurencyjności brytyjskiej gospodarki, co wpływa także na kondycję rynku pracy.
