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May 13, 2021, 9:11 a.m. EDT

Industrial policy and Fed policy are the keys to confronting inequality and China

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Peter Morici

The  economy is on a tear  but how well it addresses the great challenges of our generation— inequality and competition with China —will depend importantly on the success of President Joe Biden’s industrial policies and  how much inflation the Federal Reserve tolerates.

Consumers have lots of extra cash , and  home sales  are red hot.   Airlines  are booking middle seats, hotel occupancies are up, Disneyland and concert venues are reopening, and crowds are forming in Times Square.

The economy is expected to grow at its  best pace  since the Reagan presidency, but the global economy’s ability to keep up with America’s appetite is severely stressed. Supplies of the building blocks of what we buy— computer chips  and  rubber  for cars,  plastics  for hospital gowns to packaging, agricultural commodities,  lumber  and more—are stressed, and the  material prices paid by businesses are surging .

Levi Strauss /zigman2/quotes/204763189/composite LEVI -2.01% , Sherwin-Williams /zigman2/quotes/210069062/composite SHW +0.44% , consumer products companies like Kimberly-Clark /zigman2/quotes/201766540/composite KMB +1.08%  and  Procter & Gambl /zigman2/quotes/202894679/composite PG +0.91% e, automakers and others are raising prices. Inflation could well reach 3% by this summer.

Breaking news: U.S. inflation soars in April to 13-year high, CPI shows, and reveals fresh stress on the economy

Fed policy

Federal Reserve Chairman Jerome Powell predicts  surging prices are temporary , but he has not offered convincing evidence to support this assertion. And the Fed is not accommodating Biden’s stimulus spending as freely as it did his predecessor’s deficits.

During 2020, the Fed printed enough money to purchase more than  $3 trillion in Treasury, housing, state and corporate securities , whereas this year the pace is  less than half as much . Consequently, the interest rate on bellwether 10-year Treasuries /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -3.87%  is up significantly.

The pandemic and new collaborative technologies unleashed a workplace revolution but now cities are in for tough post-COVID adjustments—fewer commuters,  more middle- and upper-class housing  replacing  commercial real estate , and less business-for-lunch venues and brick-and-mortar retailing.

Structural unemployment

To accommodate health risks in the workplace and political pressures to raise wages, we can expect even  more automation  on factory floors, in warehouses and at retail checkout. And a paradox of structural unemployment for those without sophisticated technology, medical, business or other professional skills alongside a booming economy.

Homelessness  and  hunger  will grow and increasingly embarrass the world’s richest nation.

The structurally unemployed need quick training and relocation assistance, but Biden’s  community college proposals  are aimed more at high school graduates. A displaced restaurant worker in New York City would be better served with access to a  Department of Labor approved, private-sector-funded apprenticeship .

Only accelerated growth in technology industries can drive demand for more jobs and higher wages in law, medicine and more moderately paying service occupations. And in turn, reverse declining opportunities for lower-skilled workers making sandwiches, cleaning homes, staffing customer service lines and in warehouses. 

We are talking 3% growth or more—a terribly illusive target.

Time to manage the yield curve

Powell  is willing to endure prolonged inflation above 2% to find it, but he must better manage the 10-year Treasury rate, which powerfully affects mortgage rates, car loans and the capital available in equity markets for business investment and high-tech startups.

Managing the 10-year Treasury rate is as important as the Fed’s official monetary policy target—the federal funds rate. The time has arrived to announce a formal policy for yield curve management.

Biden recognizes Americans must up their game. Subsidies lavished on high tech in China, Korea and elsewhere translate into lost jobs in America making computer chips and 5G infrastructure but also jobs in law, business, medicine, restaurants, fitness centers, and dry cleaners.

Fewer jobs and downward pressure on wages for the lower half isn’t just about import competition, automation and  monopoly power in labor markets  the left rails about. It’s also about the Republican Party’s failure to recognize that industrial policy is not a moral failure but a response to the China challenge for global leadership. And the Democratic Party’s penchant to see every spending imperative as an opportunity to drive its agenda on climate change, sexism, racism and classism.

Without meeting China head on and without artificial constraints, neither the purity of free markets nor creating of the  Peaceable Kingdom  are possible.

Biden’s infrastructure plan  would spend too little on roads and bridges and too much on the  Green New Deal  and  other progressive causes  but does get one thing right. Its support for R&D, manufacturing, internet access and  semiconductors  is spot on.

Only by continuing leadership in technology across the board—not in jobs count but in patents—can America have a big-enough pie to accomplish a just society.

<STRONG>Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.</STRONG>

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$ 26.31
-0.54 -2.01%
Volume: 810,535
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Dividend Yield
0.38%
Market Cap
$10.75 billion
Rev. per Employee
$300,729
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$ 269.67
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Volume: 751,980
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34.98
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0.82%
Market Cap
$71.85 billion
Rev. per Employee
$300,859
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$ 130.28
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Volume: 1.59M
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P/E Ratio
19.53
Dividend Yield
3.50%
Market Cap
$43.49 billion
Rev. per Employee
$416,087
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Volume: 5.09M
June 17, 2021 3:37p
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2.60%
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$325.08 billion
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