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61. What Determines Interest Rates?

Author:
John H. Makin
Publication Date:
01-2005
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The pundits who have been predicting higher interest rates based on large U.S. budget and current account deficits have some explaining to do. Beyond the fact that very little systematic empirical evidence exists of a close link between deficits of any kind and interest rates, many high-profile commentators such as Robert Rubin and Pete Peterson, not to mention Pimco's Bill Gross, have consistently warned that long-term interest rates would rise as America's budget and current account deficits rose. Actually, U.S. longterm interest rates have been falling-from 4.8 percent in early June to 4.1 percent at year-end. Despite this stellar performance, Gross has even gone so far as to suggest that U.S. government liabilities should be downgraded from their top rating of AAA to AA.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States

62. Time for More Currency Flexibility

Author:
John H. Makin
Publication Date:
12-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The last big wave of European and Japanese concern about a weak dollar came after the August 1971 breakdown of the Bretton Woods System of fixed exchange rates. At that time European countries feared inflation and, not wanting to support the dollar and thereby import U.S. inflation pressures, they accepted revaluation of their currencies with some misgivings because, as always, a weaker dollar meant more difficulty in competing with vigorous U.S. traded-goods companies.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States and Europe

63. Listen to the Markets

Author:
John H. Makin
Publication Date:
11-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Market behavior in 2004 has defied most predictions. Interest rates and stock prices have dropped—the reverse of most forecasts at the start of the year. The dollar has been broadly trendless despite a rising and "unsustainable" current account deficit that was supposed to have pushed it down. And, of course, the price of oil, which was widely expected in January—not to mention February, March, April, May, and June—to drop back below $30 per barrel has risen relentlessly to well above $50 per barrel.
Topic:
Economics, International Trade and Finance, and Political Economy

64. The Recovery: Three Years On

Author:
John H. Makin
Publication Date:
10-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The U.S. post-bubble economic recovery, which officially began in November 2001 after a recession of just six months, will be three years old by election day. The prior recession had lasted a mere eight months-from July 1990 to March 1991-and was followed by an expansion of ten years, the longest on record. The expansion before that one lasted ninety-two months-from November 1982 through July 1990-following a recession of just sixteen months. The period following November 1982 until the stock market crash of March 2000 witnessed one of the longest and most powerful stock market rallies in U.S. history, accompanied by falling inflation and falling interest rates. The remarkable performance of the last twenty or so years will be difficult to match over the next decade. Indeed, merely sustaining the growth in the current expansion will require some changes to current policy.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States

65. Oil and Stagflation

Author:
John H. Makin
Publication Date:
08-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
I am not an expert on the price of oil. But many who claim to be have been saying for months that its price should drop back below $25 or $30 per barrel. Meanwhile, the actual price has risen steadily to nearly $50 per barrel as this Outlook goes to press.
Topic:
International Relations, Economics, and Environment
Political Geography:
United States

66. Paradise Lost

Author:
John H. Makin
Publication Date:
05-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
It sure was wonderful while it lasted. Last year was a halcyon period of higher growth and lower inflation, when annualized productivity increases of over 5 percent during the last two quarters gave us GDP growth averaging over 6 percent, while inflation and interest rates fell and earnings surged. These conditions were wonderful for the stock market. Fourth-quarter 2003 corporate profits were more than 20 percent above year earlier levels—nearly four times the average rate of increase over the past decade. The S rose over 40 percent between April 2003 and January 2004.
Topic:
Economics, International Trade and Finance, and Political Economy

67. America Demands; China Supplies

Author:
John H. Makin
Publication Date:
04-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Say's Law, named after French economist Jean- Baptiste Say (1767–1832), was promulgated at the time of the Industrial Revolution when some feared that purchasing power would be insufficient to absorb the ever-growing output of the newly mechanized economy. It states simply and reassuringly that supply creates its own demand. More specifically, the production of output tends to generate purchasing power equal to the value of that output.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
China, America, and Asia

68. Watch Growth, Not Exchange Rates

Author:
John H. Makin
Publication Date:
03-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The attention being paid to exchange rates and to utterances about them by finance ministers and central bankers is misplaced. It is distracting policymakers from tending to more serious issues such as global excess capacity and attendant deflation risks.
Topic:
Economics, International Trade and Finance, and Political Economy

69. The Opposite of Stagflation

Author:
John H. Makin
Publication Date:
02-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The blissful combination of higher growth and lower inflation that has characterized the U.S. economy since last spring is the inverse of stagflation, the nightmare scenario that followed the oil shock of 1973–74, when higher oil prices produced lower output, lower growth, and higher inflation. The current cycle is fundamentally benign—more output at lower prices—but if policymakers fail to recognize it as such and ignore falling prices because output growth is strong, a global recession could occur.
Topic:
Economics, International Trade and Finance, and Political Economy

70. As Good As It Gets

Author:
John H. Makin
Publication Date:
01-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Old habits die hard. Often, criticism leveled at policymakers is well founded. I certainly have offered up my share. But as 2003 ends and 2004 begins, we find ourselves at a point where the performance of the U.S. economy is about as good as it gets. The stock market is up 20 percent this year, inflation and interest rates are low, productivity growth is high, and U.S. exports are rising strongly. The biggest danger going forward arises from ill-founded criticism aimed at policy measures employed to achieve this excellent outcome and the (fortunately low) chance that policymakers will heed such criticism.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
United States