Harper: Following Election, Expect Interest Rate Increase

Nov 3, 2016

In this week’s Economic Report, Dr. Rick Harper talks about his recent economic outlook presentation to the Pensacola Rotary Club where he discussed issues that will face our next president, including interest rates, the national debt and the North American Free Trade Agreement.

With less than a week to the election, Harper spoke to the group about where the economy stands now and what we could see after all the votes are counted, particularly with the Federal Reserve and the expected interest rate hike in December.

“The election is looming, and we expect to see the Federal Reserve raise rates once before the end of the year. They’ve got their meeting in December still to go,” Harper said. “The Fed is always a source of uncertainty. And really by keeping interest rates so low for so long, as we’ve talked about, there’s a possibility for a bubble in the housing market. Prices have recovered across the nation and here in Northwest Florida, prices are on their pre-recession trend.”

Credit Michael Spooneybarger/ CREO

The low interest rates have also had effects outside the housing market.

“The low interest rates have also kept the stock market very high over time because when you can’t earn any money on fixed-rate investments you’re forced into higher risk investments such as stocks,” Harper said.

The national debt is also another area that will be top of mind for whoever is elected.

“The new president – Democrat or Republican – is going to have to do a lot to reduce the growth rate of the federal debt,’” Harper said. “When the budget was about $3 trillion and we were running a 10 percent deficit, that’s massive and now that we’ve got a federal debt that in gross terms is approaching $20 trillion and in terms of the measure that matters, which is the national debt held by investors in the private sector or outside the U.S., that measure has gotten to 75 percent of the debt held by the U.S. government of the gross domestic product.”

Harper said the debt is reaching a problematic area and the next president will have to bring that ratio down.

“It expanded greatly with the stimulus programs associated with the recession,” Harper said. “What’s on the horizon, inevitably, is some combination of an increase in revenue through taxes and a cut in spending. Do you make the tough choice to cut Medicare, Social Security and defense, or do you make the rough choice to raise taxes? It’s going to be interesting to see.”

Another topic that both candidates have been discussing is NAFTA. NAFTA was signed back in the early ’90s, an initiative of the President George H.W. Bush and carried on by President Bill Clinton.

“NAFTA, in my view, has been a success. When you take a nation as big as the United States and all the demand that’s here from 230 million people with the world’s highest incomes and you put that demand into a country the size of Mexico, it causes massive relocations in Mexico because when the trade barriers come down and Mexicans can buy cheap agricultural exports from the U.S. – they’re buying corn, they’re buying rice, they’re buying beans, they’re buying meat – those things disrupt the traditional farming economy of Mexico,” Harper said. “When all the export jobs in Mexico then are in the export zones and in the export cities making stuff, whether it’s under contract to an American firm and shipping it back to the U.S., when those jobs become predominant in the Mexican economy, it disrupts the traditional way of life, but raises the standard of living.”

Mexico has one-third the population and about one-quarter of the per capita income of the U.S. and does not have a big impact on the U.S. economy, Harper said.

“The point to be made is that the real issue is income distribution,” Harper said. “Automation, as well as trade, are putting lower-skilled workers at risk for their jobs and livelihoods and that’s the issue that needs to be addressed. However, cutting trade with Mexico and revamping NAFTA is not going to get the job done because developing nations – China, Mexico – have lost many more manufacturing jobs than the U.S.”

Dr. Rick Harper serves as associate vice president for research and economic opportunity at the University of West Florida and oversees the University’s Center for Research and Economic Opportunity. He can be reached at rharper@uwf.com. CREO staff writer Mike Ensley contributed to this report. He can be reached at kensley@uwf.edu.

This article is part of a collaboration between WUWF and the UWF Center for Research and Economic Opportunity.