Por Alejandro Chafuen: Publicado el 30/3/21 en:
Where is the economy heading in 2022? 2021 started amid Keynesian optimism: government spending paid with easy money seen as a magic elixir that can solve any economic crisis. If socialism fails because you eventually run out of other people’s money, Keynesianism fails when the benefits of easy money have reached their limit. While the monetary authorities told us that the inflation we were seeing was transitory earlier in the year, they later abandoned that narrative. The questions are: has monetary easing run its course as a useful economic policy tool? For how long will we suffer these much higher rates of price increases?
In these yearly analyses of the US economy, I focus on the underlying fundamentals that I consider essential to healthy growth, together with the influence of the world economy and the US’s major trading partners.
In Table 1, I list key indicators of twenty of the top economies in the world. I focused on those where I had measurements of economic freedom and a rule of law score as assessed by the World Justice Project (RLI). Thus I have left out Switzerland, Taiwan, and Saudi Arabia, which do not appear in the RLI. Including them in the statistical analysis would not have altered my conclusions.
These twenty economies produce 80 percent of the world’s output. Sixty percent of the world’s population lives in them. As you can see from the accompanying table, they are also diverse. Africa is the only continent that lacks representation among the top 20. Analyzing these economies, given their weight, provides enough information to analyze the international factors that might influence the performance of the US economy.
The trends are not good going into 2022. Among the top twenty, nine saw their rule of law score go down, only two improved, and nine remained unchanged. We saw declines in the two largest economies, the United States and China, representing 50 percent of the combined GDP of these top 20 countries. Economic freedom scores went down in thirteen of these countries and improved in five, while two were unchanged. The US and China were among the nations with lower economic freedom scores.
The rule of law is essential for long-term economic growth. I incorporate its measurements to produce a simple «economic freedom with justice» index. I add both scores and use the average to forecast a given economy’s potential.
When I rank countries by this combined rule of law score and economic freedom (Table 2), the US still scores in the top ten. In addition, to understand how attractive an economy is for local and foreign investors, I have added a score for the size of an economy and the expected growth rate. Both factors are relevant for investments. They complement the policy indicators that factor into the index of economic freedom, the rule of law index, and the country’s political environment. As the US is the largest economy in this group and fifth in expected growth rate, I consider the US well positioned to continue attracting more foreign investment and entrepreneurial talent than most other countries. With Latin America expected to underperform compared to the rest of the world, I anticipate that drain of human capital from that region towards the US will accelerate.
Canada, China, and Mexico, the US’s three most significant trading partners (each representing just above 14% of our current trade), will continue to see economic improvements. Only China is growing at a faster rate than the US. Their fiscal deficit is lower than that of the US, so I do not see that factor as their main problem. However, with different styles of populism in Canada and Mexico and authoritarianism in China, these countries’ leaders tend to side more with the state than with a free economy. Only China will likely grow more than the US, but not as much as in 2021. Its lower growth, in addition to continued concerns about its trading and investment practices, will dampen the positive effects of trade and investments involving China.
I have been writing this column since 2013, and this is the first time that I expect inflation to be the number one topic discussed. While many blame supply chain issues, labor «shortages,» and even the climate for rising prices, the focus should be on the Federal Reserve’s policies. Inflation is a monetary phenomenon. When the money supply grows faster than the supply of goods and services, sooner or later, prices will rise. As inflation is a covert way to pay for public spending, it tends to be popular with governments. Public officials tend to blame price increases on «greedy» corporations charging more for their products and services. Sen. Elizabeth Warren is a good example. Robert B. Reich, former Secretary of Labor in the Clinton administration, also recently blamed «corporate greed.» But today, perhaps more than ever, voters tend not to trust politicians, the media, or government-connected economists when they face higher costs of living. If prices continue to rise at the current pace, it is almost sure that we will see a massive Republican victory in the 2022 midterm elections. Except perhaps for the price of gas, the current inflation is not the fault of the Democrats alone. But, at the ballot box, voters respond more to perceived economic realities than to policy analysis.
While in most indicators that I present in Tables 1 and 2, the US scores better than the average of the 20 largest economies, it scores in the bottom half in inflation. The Federal Reserve will be in a hard place when it begins to increase interest rates next year. We will likely see an economic slowdown and a correction in the stock market. I expect that the Fed will try to avoid being seen as the spoiler of the party and once more accommodate its monetary policy to the political needs of the party in power.
The likelihood of a change in the US’s political-economic climate after the midterms, which will also likely make it harder for the administration to increase regulations and taxes, is a source of optimism for potential investors. Republicans have a better record in halting the growth of government spending when in opposition than when having a majority. It is reasonable to expect that after November 2022, it will be harder for the Biden administration to implement a more radical interventionist agenda.
I left for the end the factors that go beyond economics but which can have a significant impact on the economy of the US and other major countries. The most relevant are:
- The continued Covid-19 crisis.
- China’s external and internal policies.
- Russia’s Ukraine ambitions.
- Potential moves by middle east players inspired by radical ideologies.
Each would require an analysis of its own. On the topic that is occupying most headlines today, the new variant of Covid-19, I expect the world to adjust to the pandemic with less draconian measures. The impact on the economy will be less than in these last two years. So to have a good 2020 in your economic decisions, focus on how to navigate the changes that will come with a less expansionary monetary policy. Do not expect the Fed to slam on the brakes, but expect cautious tapering.
Alejandro A. Chafuén es Dr. En Economía por el International College de California. Licenciado en Economía, (UCA), es miembro del comité de consejeros para The Center for Vision & Values, fideicomisario del Grove City College, y presidente de la Atlas Economic Research Foundation. Se ha desempeñado como fideicomisario del Fraser Institute desde 1991. Fue profesor de ESEADE. Síguelo en @Chafuen