Fed Considers Raising Interest Rates

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No one could reasonably have expected interest rates to remain at near-zero forever, and after more than six years at this level, 2015 may be the year we finally see them go up. The debate between those who want to see the rate raised and those who want to see it stay at its current level is summarized well in a recent Economist article: “Monetary hawks will warn of looming inflation and growing asset bubbles. Doves, meanwhile, will warn that a rate hike, no matter how small, will shatter the fragile American economy. At the moment, neither claim is true and the Fed would be wise to ignore such speculation.”

It is definitely true that exaggerations exist on both sides, so it’s best to focus on some statistics. Those who suggest keeping rates low can point to the fact that “the Personal Consumption Expenditures (PCE) index, is currently at just 0.2% year-on-year and has fallen below the Fed’s 2% target for 38 straight months. Core inflation is currently a mere 1.2%.” Further, “while unemployment has fallen from a high of 10% to 5.3% today, other important measures have made little progress. The labour-force participation rate for prime-age workers (those between the ages of 25 and 54) is only slightly above its 30-year low.”

On the other hand, an “earlier rate rise would help stave off inflation while containing possible bubbles in stock and housing markets. Minutes from the latest FOMC meeting indicate that members believe an earlier hike would also ‘convey the committee’s confidence in prospects for the economy,’” – a very important message for the American public.

While the article concludes by suggesting that patience may be in order, I would lean towards raising the rate. When they were set at near-zero six years ago, the economy was in a very different place than it is now. The prospect of easy money will always be difficult to give up, but in an eventual full economic recovery, raising the interest rate is inevitable. Whenever that event takes place there will be voices against it, but it must happen eventually, and now may be the right time.

Futility of the Drug War and Coca Eradication

yuri vanetik crop dusting

Over the coming and months and years, with the presidential race now underway (if only in its infancy) we are sure to hear stump speech after stump speech about futile policy, failed initiatives, and government waste in general. Perhaps no policy embodies all of these more than the War on Drugs. A recent article in the Economist begins, “Seldom can such a laborious public policy have been devoted to such a futile end.” I would offer one amendment to this statement – this laborious policy has not been devoted to a futile end, but rather to a futile dragging on.

The article goes on to cite a couple of key statistics. “For the past 15 years or so Colombia has used crop-dusting planes operated by American contractors to spray around 130,000 hectares (321,000 acres) a year of its land with glyphosate, a powerful weedkiller, in an attempt to wipe out the coca crop that provides the raw material for cocaine.” 321,000 acres sounds like a very large area, especially when one considers the following – “harvested coca accounts for less than 10% of the value of cocaine exports (and much less of retail value in foreign markets).” The problems here are clear – this is incredibly wasteful and the target is wrong, not to mention the potential health risks of spraying this chemical over populated areas.

So what needs to happen, especially in the case of Colombia and Peru? “Many, including [The Economist], believe that legalising cocaine is the least bad option.” “Least bad” is the key. The other options truly are less appealing. Further waste should, obviously, be halted as soon as possible, as should arrests of consumers and small time dealers. Perhaps more focus could be put on those involved in trafficking, but this still comes with no guarantees of success. One thing that is a guarantee, though, is that if coca were legalised, a big part of the Drug War would be halted, which would be another step toward the end of this futile and wasteful policy. In the upcoming election season, the writer of one of the aforementioned stump speeches that clearly stated support for such an initiative might be surprised by the amount of support they would find.

Airline Customer Service

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A recent article in the Gulliver section of The Economist covered something that is a big pet peeve of mine – the way airlines treat people. To people who fly regularly, it often feels as if service is getting worse and worse, and that we are being nickel and dimed more and more. In fact, these two elements naturally go hand in hand, since, if you have to pay an additional fee to receive a particular service, that means it isn’t being given in the first place. Therefore, if you don’t pay extra for things like seat upgrades, checked bags, and priority boarding, you will feel that your experience is lacking something – correctly, I might add, because it is lacking something, namely quality customer service. Regarding additional fees during air travel, the article cites an important statistic: “…global airline ancillary revenue reached $31.7 billion in 2013, with United Airlines accounting for $5.7 billion of that by itself.”

But as the article goes on to point out, one’s initial instinct to assume that this is a nefarious plot by big companies to squeeze us for all we’re worth may leave out a large part of the picture, specifically how a consumer shops for their airline. “While we might say in surveys that we care about quality, when it comes down to clicking the button to purchase a flight, we overwhelmingly choose an airline on price.” This being the case, it becomes logical that all airlines would begin operating at the lowest common denominator in order to remain competitive, slashing prices by curtailing services that become add-ons you can pay more for.

One thing an informed consumer can begin doing is not just looking at price, but also looking at what you get for the price. They may find that they can actually save money on their trip overall if they pay a little more up front on a flight that includes, for example, an extra checked bag and an in-flight meal that they would have to pay an additional fee for on another airline. Though this may make the buying experience a bit more tedious, it might make the flight more pleasant, and make the person feel less taken advantage of. Then, the next time a flight attendant says, “We hope you enjoy your flight,” it doesn’t have to sound like a wry joke.

Houston’s Economy

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An article in The Economist says it accurately and concisely: “Houston is an oil town.” And recently this oil town has been booming. The article cites two important statistics to support this – “In the decade to 2010, the population of its metro area grew more than that of any other American city. Between 2009 and 2013 its real GDP increased by 22%, more than twice as fast as the American economy as a whole.” But with oil prices depressed, many are questioning whether such growth can possibly continue. Indications from many of Houston’s businesses, and an analysis from Bloomberg that shows a direct correlation between Houston metro area employment and oil prices, suggests an answer: Probably not.

On the bright side, however, much of the investment in the area “such as in Mobil Exxon’s new campus is committed, and will not stop now.” Houston as a whole has the opportunity to reap the benefits of long term investment that has been made in the area. While this won’t keep the city and its workers afloat forever in the face of an extended period of low oil prices, it can be something of a life raft during a short term slump.

One other important factor working in the Houston economy’s favor is the fact that over the past few decades it has become more dynamic, and so no longer revolves only around oil. Notably, Houston has one of the busiest ports in America, and is home to several universities and all of the restaurants, nightlife locations, and stores typically associated with college towns. It also, at least currently, hosts a booming building sector. That the economy is no longer so monolithic means, hopefully for Houston residents, that the previously mentioned correlation between area employment and oil prices could be undermined. It also means that, should oil prices turn around, Houston’s economy could become stronger than ever.

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