by SC Staff Writer Jan Holly
Economist Danny Blanchflower surprised his audience at the Economic Outlook Seminar, held Jan. 8 in the Phillips Gallery, by audaciously asserting that “Trump is right” about the Federal Reserve’s decision to raise interest rates.
“Many people hate Trump. That’s a reality,” Blanchflower said, “but he is right that we have seen a rising of interest rates when we shouldn’t. It explains the slowing of [the economy of] Europe and a slowing of the [American] economy.”
Amplifying his statement, Blanchflower called the Federal Reserve’s recent policy “a cataclysmic error. Recoveries usually end, because the Fed raises rates,” he said.
A professor of economics at Dartmouth College, Blanchflower was one of four panelists leading the Seminar, which is sponsored annually by the Island’s longstanding discussion group, Current Events. He appeared with Dick Pyle, president of the Sanibel Captiva Trust Company; Richard Sims, recently retired chief economist for the National Educational Association; and Larry Davidson, professor emeritus of business economics and public policy at Indiana University. Davidson regularly teaches in BIG ARTS’s Winter Academy.
Pyle characterized America’s economic outlook as uncertain. “With an uncertain environment, forecasting is difficult, but in 2019, we can expect economic growth to slow. We do not expect a recession in 2019, but it depends on a variety of uncertain things.”
Pyle pointed to the “massive” tax cut as a reason for more growth in 2018 than 2019. “In 2019, we won’t have that stimulus as much, and deficit spending won’t be as large,” he said.
Pyle expressed concern about the uncertainties over tariffs. “Free trade is essential to world economic growth,” he said. “If the tariff debate metastasizes into protectionism, it could have an impact on business leaders’ willingness to grow their businesses. If you don’t know about tariffs, you can’t predict demand,” he added.
Davidson agreed with Pyle about economic uncertainties. “There has never been a time that is so uncertain. I am not confident about growth,” he said.
Davidson predicted an economic slowdown. “We will slow from 3% to 2% per year in growth,” he said.
On the question of a recession, Davidson’s opinion was firm. “Of course, obviously, there is one coming, but the timing and magnitude are not clear. I see no reason to forecast it in 2019 or 2020.”
Davidson advised caution about risk. “Risks are real. We shouldn’t dismiss them, but uncertainty and risk are probabalistic. What is real and what might be real are different. In any given year, if ugly things popped up their heads, growth would slow.”
Sims expressed concern about America’s fiscal policy, “which is off the table. Spending slows when the economy slows,” he said. “We pull back when we need to be spending more.
Sims cited rising inequality as another factor contributing to slower growth. “We have the world’s most progressive tax system, but we have the least progressive spending [policies],” he said. “Over the last two decades, while income at the top has been rising, we have had less support for [those with] lower incomes.
“The tax system has left a lot of Americans behind, and that exacerbates the situation,” he added. “We have to be inclusive. The long-term slowing of growth is a consequence of rising inequality.”
Elaborating on that theme, Blanchflower explained that central banks “have no tools to do anything about inequality. If you allow the central bank to be the prime arbiter of policy, you can’t help inequality. We help asset folders,” he said. “We don’t help people who don’t have assets.”
Responding to a question about the United Kingdom’s economic future, Blanchflower pointed to Brexit as “the most amazing self-inflicted wound of all time. The monetary and fiscal authorities have no ability to prevent the terrible shock that’s coming,” he said. “No one will put a new investment plan into the UK. Will there be an impact? The answer is ‘Duh!’”