Slaughter & Rees Report - All Is Quiet on New Year’s Day
January 6, 2014 --
Happy New Year. We hope your end-of-year holidays were restful. By our humble eyes, one of the most remarkable aspects of this New Year is how quiet it has been (fireworks aside) compared to recent history.
Think back five years. On New Year’s Eve 2008 the Dow Jones Industrial Average closed at 8,776.39—a plunge of nearly 3,000 points since Labor Day that year. In that December alone the U.S. economy had shed 705,000 payroll jobs. The financial crisis was still at its most acute, with grave concerns about what 2009 would bring. Or think back just one year. On New Year’s Eve 2012 America teetered on the edge of the “fiscal cliff,” with tax and spending changes frantically agreed upon only in the wee hours amidst new depths of partisan rancor and widespread concern about the collective damage to jobs and growth.
New Year 2014 dawned on the global economy with relative tranquility. Congress has avoided another government shutdown by last month agreeing to a budget framework for fiscal 2014 and 2015. The Dow closed 2013 at a record high of 16,576.66, having recorded its best single-year performance since 1995, with many analysts saying high equity prices foretell continued economic recovery. Across the Atlantic, concerns about runs against European banks and sovereigns continue to abate amidst forecasts of economic growth (albeit modest) for the European Union in 2014. And after years of fears that the Euro currency would somehow explode and wreak havoc on the world economy, on Jan. 1 the Euro Zone actually expanded as Latvia became the 18th country to relinquish its sovereign currency for the Euro.
Whence all this calm? One cause is continued historic easing by the world’s central banks. Another is the simple passage of time that continues to heal wounds of the financial crisis; for example, household and fiscal balance sheets in many parts of the world improving to support stronger demand. And a third is ongoing innovation and productivity growth in sectors like energy and information technology—gains that arise largely regardless of the business cycle.
Amidst this New Year’s quiet we have one simple wish: that government leaders seize the opportunity it provides to address long-term economic challenges. After years of exhaustedly careening from one economic crisis to the next, government leaders in early 2014 should focus on policy changes to accelerate growth of output, jobs, and incomes that so many countries so acutely need. This growth agenda would look remarkably similar in many of the world’s key economies: liberalization of international trade, investment, and immigration; simplification and reduction of business taxation; and fair yet firm reforms to control entitlement spending.
In most countries, government leaders devote a limited amount of time to economic matters. More time battling economic crises has generally meant less time building economic foundations. The new year dawns with the chance to focus on foundations. But the current economic quiet may prove fleeting. Whether government leaders choose to take advantage of it remains to be seen. Here is hoping they do.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.
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