The New York Times - 19.09.2019

A12 N THE NEW YORK TIMES NATIONALTHURSDAY, SEPTEMBER 19, 2019

The 45th PresidentThe Economy

History doesn’t repeat, they
say, but it often rhymes. And the
latest economic headlines feature
an uncanny tonal resemblance to
those of the early 1970s.
General Motors workers are on
strike, seeking more of the spoils
of their employer’s successes. The
president of the United States is
pressuring the Federal Reserve to
lower interest rates, hoping for a
booming economy as he seeks re-
election. And now, violence in the
Middle East is pushing up global
oil prices.
At first glance, at least, it seems
similar to an era of gas lines and
“stagflation.”
In each of these situations,
though, there are big underlying
differences between the early
1970s and now. Understanding
those differences is important in
properly understanding the world
economy in 2019 and the risks
posed by this combination of
events.
The G.M. strike, which began
late Sunday with about 50,000 au-
toworkers walking off the job,
could turn out to be the most im-
portant clash between labor and
management in years.
The early 1970s was also a peri-
od of labor strife: G.M. workers
went on a major strike in 1970, de-
manding higher pay. But the con-
text was different, and so were the
economic implications.
That was an era of rapid infla-
tion, and labor unions were at the
height of their power — two phe-
nomena that were connected. The
G.M. workers demanded pay in-
creases that would outpace the al-
ready high rate of inflation, and
with the strike, they got it. Over
the three-year contract from Sep-
tember 1970 to September 1973,
autoworkers’ pay rose 6.5 percent
a year, comfortably above the 4.
percent annual inflation rate.
Autoworkers and other power-
ful unions in that era fueled higher
inflation economywide by de-
manding — and getting — ever-
escalating pay increases, which
fed into consumer prices.
That’s not what is happening in

2019. It’s not just that union mem-
      bership has fallen to 10.5 percent
      of the work force in 2018 from
      about 25 percent in the early
      1970s.
      The autoworkers striking today
      are essentially trying to claw back
      some of the compensation they
      have lost over a brutal decade. Av-
      erage wages in the motor vehicle
      industry have fallen 2 percent
      since 2010, according to the Cen-
      ter for Automotive Research,
      amid an 18 percent rise in con-
      sumer prices over the same peri-
      od.

Instead of workers’ salary de-

mands fueling too-high inflation,

as in 1970, this time the low pay of

autoworkers has been a factor in

too-low inflation, which the un-

ionized workers are hoping to re-

verse.

Similarly, the upside-down

world of low inflation affects the

unusual politics around the Fed-

eral Reserve.

President Nixon and his aides

blatantly pressured Arthur Burns

of the Federal Reserve to increase

the money supply, despite rising

inflation, viewing a strong econ-

omy as the key to Mr. Nixon’s 1972

re-election campaign. They used

both public and private pressure,

and some underhanded moves

like leaking false information that

Mr. Burns had sought a large pay

raise.

Mr. Nixon didn’t have Twitter.

President Trump has taken to

assailing the Fed chair, Jerome

Powell, by tweet and calling for

steep interest rate cuts. In recent

weeks, he called Fed leaders

“boneheads” and suggested that

Mr. Powell is an enemy of the

United States.

But the economic environment

in which the Fed is operating

means that the attacks have dif-

ferent implications than Mr.

Nixon’s did. In the 12 months

ended in August, the Consumer

Price Index rose only 1.8 percent;

in the equivalent 12-month period

ending in August 1971, it was up

4.4 percent.

The Nixon-era pressure, in

other words, came at a time when

the downsides of excessively easy

money were apparent. In 2019, the

Fed is dealing with a different

struggle. It has failed to get infla-

tion consistently up to the 2 per-

cent level it targets, and there is

evidence that Fed interest rate in-

creases in 2018 have slowed the

global economy in 2019 in ways

that are reinforcing these defla-

tionary forces.

Mr. Trump’s methods and tone

are unconventional, and the scale

of the interest rate cuts he seeks is

out of line with what most main-

stream economists think would

make sense. But his general idea

— that interest rates need to be

adjusted downward to keep the

economic expansion on track — is

relatively mainstream.

And Mr. Powell and the Fed are

likely to act on that logic Wednes-

day afternoon, delivering a sec-

ond rate cut in two months.

The latest tumult in the Middle

East delivers further complexity

for the Fed and other economic

policymakers. An attack over the

weekend that incapacitated much

of Saudi Arabia’s oil production in-

frastructure caused a 13 percent

spike in the price of West Texas In-

termediate crude oil to start the

week (prices fell some on Tues-

day, reflecting optimism that

Saudi output would return to nor-

mal quickly).

The stagflation — stagnant

growth combined with inflation —

of the 1970s was caused in large

part by repeated disruptions to

global oil supplies, which led to

soaring prices and gasoline short-

ages in the United States.

If a major conflict were to break

out in the Middle East, such as be-

tween Iran and Saudi Arabia, the

impact on the world economy

would be severe. But the United

States is well insulated from more

moderate swings in energy prices

like those evident so far, and could

even benefit from them.

First, on the demand side, the

“energy intensity” of the Ameri-

can economy has declined precipi-

tously since the 1970s, meaning

that each dollar of economic out-

put takes less energy to create.

Second, American oil and natu-

ral gas production has risen, espe-

cially in the last few years. That

means that while higher energy

prices may hurt consumers, they

have a countervailing positive im-

pact on oil-producing parts of the

United States and the industries

that serve it, like those that sell

equipment for energy explora-

tion.

Third, the dynamics around in-

flation that also affect the G.M. ne-

gotiations and the Fed’s options

have a side effect: There is less

reason now to think that a shock to

energy prices would flow through

to rapid inflation for all goods.

Fewer workers have union con-

tracts containing automatic cost

of living raises, for example, and

the Fed has become more savvy

about disentangling the short-

term effect of more expensive oil

from a broader wave of inflation.

None of this means that the

economy is free from risks. The

trade wars could bubble over into

a broader slump. The Fed could

miscalculate as it sets policy. Or

the geopolitical situation could

break down more quickly than

now looks likely.

But a changing world means a

different set of risks, no matter the

superficial similarities to the past.

News Right Out of the ’70s, but Today’s Risks Are Different

Lining up for gasoline in December 1973 in New York City. Today, the United States is much better insulated from oil price shocks.

MARTY LEDERHANDLER/ASSOCIATED PRESS

By NEIL IRWIN

“Jay Powell and the Federal Re-
serve Fail Again,” Mr. Trump said
in a tweet shortly after the Fed’s
announcement. “No ‘guts,’ no
sense, no vision! A terrible com-
municator!”
Stocks initially fell on the Fed’s
announcement. But they ended
slightly higher on the day, and
Treasury yields barely moved,
suggesting that the Fed’s decision
and communication were roughly
in line with investor expectations.
Fed officials are keeping their
options open because they face an
uncertain outlook. Businesses are
hiring and consumers are spend-
ing, but Mr. Trump’s trade war
and prospects of an unruly British
withdrawal from the European
Union have markets on edge. In-
flation has been stuck below the
Fed’s 2 percent annual target, giv-
ing officials room to lower rates
without worrying about runaway
price gains.
“Since the middle of last year,
the global growth outlook has
weakened,” Mr. Powell said.
“Trade policy tensions have
waxed and waned,” and “elevated
uncertainty” is weighing on busi-
ness investment and exports, he
said.
Given those risks, momentum
has shifted toward further accom-
modation. While the median Fed
official expects rates to stay at the
current level through the end of
the year, seven of 17 expect an-
other rate cut. Not a single official
expected three rate cuts in 2019
when the central bank last re-
leased economic projections in
June.
The decision to lower borrow-
ing costs twice in three months is
itself a significant pivot for the
central bank, which raised rates
four times in 2018 and planned to
be “patient” on rate moves as re-
cently as March.
Mr. Powell said the change in
the Fed’s policy stance over the

course of the year was “the main

takeaway.” And in its official state-

ment after its meeting, the com-

mittee again pledged to “act as ap-

propriate to sustain the expan-

sion.”

But against a complicated eco-

nomic backdrop, officials are in-

creasingly divided. Three mem-

bers of the rate-setting Federal

Open Market Committee dis-

sented in this month’s vote, the

most no votes at a single meeting

since 2016.

James Bullard, the president of

the Federal Reserve Bank of St.

Louis, wanted a bigger cut. Esther

George, who heads the Federal

Reserve Bank of Kansas City, and

Eric Rosengren, who heads the

Federal Reserve Bank of Boston,

thought that the central bank

should keep borrowing costs

steady. Ms. George and Mr.

Rosengren also voted against the

July rate cut.

Mr. Powell acknowledged those

divisions, calling it “a time of diffi-

cult judgments” and adding that

the bulk of the committee was as-

sessing the economy “meeting by

meeting.”

Mr. Powell also pushed back on

Mr. Trump’s recent call for the Fed

to slash rates below zero, saying

such an idea was rejected during

the height of the 2008 financial cri-

sis and would not be high on the

list of options if the economy wors-

ened. If the Fed is forced to cut in-

terest rates back to rock bottom,

he said, it will again turn to bond-

buying programs to provide add-

ed stimulus.

“I do not think we would be

looking at using negative rates,”

he said.

Although the Fed operates inde-

pendently of the White House and

answers to Congress, Mr. Trump

has made a habit of criticizing Mr.

Powell, whom he chose in 2017 to

lead the Fed. Mr. Powell, asked re-

peatedly on Wednesday about Mr.

Trump’s comments, reiterated

that the Fed did not take politics

into account when making policy

decisions.

Still, Mr. Trump’s negative

drumbeat might create an optics

problem for the institution. Some

onlookers could view rate cuts,

like Wednesday’s, as a sign that

the central bank is caving to politi-

cal pressure, particularly as dis-

sent abounds.

There is an economic rationale

for lowering rates sooner rather

than later, since doing so could

keep credit flowing, helping to bol-

ster consumer and business

spending as uncertainty climbs.

Mr. Powell said Wednesday that

“it can be a mistake to hold on to

your firepower” until a downturn

hits.

Even though employers are hir-

ing, wages are gradually rising

and Americans in their prime

have been coming back into the la-

bor force, the University of Michi-

gan consumer sentiment index

has drifted lower recently on the

back of trade concerns. Jitters

about the economy were also re-

flected in the Business Round-

table’s C.E.O. Economic Outlook

Index, which declined to a three-

year low in the third quarter.

Mr. Trump has placed tariffs on

$360 billion worth of Chinese

goods and plans to impose levies

on nearly all Chinese imports by

the end of the year.

Chuck Robbins, the chief execu-

tive of Cisco Systems, said at the

U.S. Chamber of Commerce in

Washington on Wednesday that

he was “very concerned” about

the trade dispute. “When the two

largest economies in the world are

not operating effectively together,

it simply is bad for the global econ-

omy,” he said.

And other global risks abound.

Germany seems to be teetering on

the brink of recession, while Brit-

ain’s exit from the European Un-

ion remains fraught. Manufactur-

ing has weakened the world over.

Meanwhile, the Fed has strug-

gled to coax inflation up to its 2

percent goal. The central bank

aims for steady inflation that is

low enough to allow for consumer

comfort but high enough to leave

policymakers extra headroom to

cut interest rates, which include

price gains, during a downturn.

Inflation came in at 1.6 percent

in July, based on the Fed’s pre-

ferred gauge, and has been mired

below its target for years. Infla-

tion expectations, as measured by

one New York Fed survey, have

slipped both in the short- and

longer-term. If growth should

take a hit, it could make it hard for

the central bank to ever achieve

higher price increases.

The Fed also addressed several

days of wild activity in an impor-

tant corner of financial markets at

its meeting.

The overnight rate on Treasury

repurchase agreements, which

are short-term loans used by fi-

nancial institutions like hedge

funds and banks, surged at the

start of the week amid a shortage

of dollars. Several factors seemed

to contribute to the spike, includ-

ing corporate tax payments and

recent government bond issuance

that sopped up cash. The Fed was

until recently shrinking its bal-

ance sheet, which probably also

contributed to the crunch.

Officials made a technical

tweak to interest rates on

Wednesday to keep the fed funds

rate, which has been creeping up

on the back of the gyrations, an-

chored within its range. At the

same time, it directed the Federal

Reserve Bank of New York’s trad-

ing desk to execute open market

transactions as necessary and

“until instructed otherwise,” to

keep the funds rate from rising

above the Fed’s target.

“If we experience another

episode of pressures in money

markets, we have the tools to ad-

dress those pressures,” Mr. Powell

said. He signaled that the Fed

might allow its balance sheet to

grow again before long, which

could help to keep markets on an

even keel.

Fed Reduces Rates Again

As Economic Risks Rise

The Federal Reserve chairman, Jerome H. Powell, announced another rate cut on Wednesday.

MELISSA LYTTLE FOR THE NEW YORK TIMES

From Page A

Alan Rappeport and Ana Swanson
contributed reporting from Wash-
ington, and Matt Phillips from
New York.

WASHINGTON — The White

House will pull the nomination of

Jeffrey Byard to be the head of the

Federal Emergency Management

Agency after a federal inquiry into

a possible barroom altercation in-

volving Mr. Byard prompted con-

cern in Congress and the White

House, according to federal offi-

cials familiar with the investiga-

tion.

While the F.B.I. determined that

the allegations facing Mr. Byard

were unsubstantiated, the White

House is expected to nominate the

current acting administrator of

FEMA, Peter T. Gaynor, to lead

the agency instead. That move is

expected before the end of the

month, officials said.

President Trump said in Febru-

ary that he would nominate Mr.

Byard after Brock Long resigned

as the chief of the agency. Mr.

Long left after the inspector gen-

eral of the Department of Home-

land Security, which oversees

FEMA, found he had improperly

used government vehicles to trav-

el between work and his home in

North Carolina.

Senator Ron Johnson of Wis-

consin, who leads the Senate

Homeland Security Committee,

confirmed to Politico last week

that Mr. Byard’s nomination had

been delayed. “There were some

issues raised that are being inves-

tigated and that’s all I’ll say about

it,” Mr. Johnson said.

The inquiry into the allegation

of Mr. Byard’s inappropriate con-

duct began after the committee

held a hearing and voted in June

to send his nomination to the full

Senate for confirmation.

A spokeswoman for the Depart-

ment of Homeland Security re-

ferred requests for comment to

FEMA. A spokeswoman for

FEMA said the agency was not

permitted to comment on accusa-

tions that involved a personal

matter that supposedly occurred

before Mr. Byard joined the

agency two years ago as associate

administrator of the Office of Re-

sponse and Recovery.

The timing of the alleged

episode, which officials say took

place in a bar, remains unclear.

FEMA, the agency tasked with

providing emergency assistance

to communities affected by natu-

ral disasters, has not had a con-

firmed leader since Mr. Long’s

resignation. In the past two years,

the agency has faced intense criti-

cism over its handling of Hurri-

cane Maria’s devastation of

Puerto Rico, which caused an esti-

mated 3,000 deaths and left thou-

sands without electricity.

Last week, a former top admin-

istrator of agency was arrested in

a major federal corruption investi-

gation that found that the official

had taken bribes from the presi-

dent of a company that secured

$1.8 billion in federal contracts to

repair Puerto Rico’s shredded

electrical grid after the hurricane.

As a top official at the agency,

Mr. Byard has had a direct hand in

providing resources to communi-

ties hit by hurricanes and wild-

fires in the United States.

The impending withdrawal of

his nomination comes in the mid-

dle of an already destructive hur-

ricane season.

Mr. Gaynor, whose intended

nomination was first reported by

Axios, had wide support in the De-

partment of Homeland Security

and has led the agency through

Hurricane Dorian, which just

missed the Virgin Islands and

Puerto Rico but devastated the

Bahamas. The hurricane, which

reached a Category 5 strength,

killed at least 50 people in the Ba-

hamas, a death toll that is ex-

pected to increase drastically.

A retired Marine, Mr. Gaynor is

also overseeing an overhaul of the

government-subsidized flood in-

surance program, which is ex-

pected to raise rates on more ex-

pensive properties and those in

higher-risk areas.

The change is only the latest

leadership shake-up at the De-

partment of Homeland Security,

responsible for overseeing the

borders, immigration policy and

addressing domestic terrorism

and cybersecurity threats in addi-

tion to disaster relief.

Officials leading each agency

overseeing immigration or border

security — United States Citizen-

ship and Immigration Services,

Immigration and Customs En-

forcement and Customs and Bor-

der Protection — are serving in an

acting capacity.

Kevin K. McAleenan, the acting

secretary of the Department of

Homeland Security, has yet to be

nominated.

And on Tuesday, the White

House fired the agency’s general

counsel, John Mitnick.

White House

Shifts Gears

On Nominee

For FEMA

By ZOLAN KANNO-YOUNGS

and CHRISTOPHER FLAVELLE