Probably the best description of a movie I’ve ever read was of Independence Day, a great science fiction B movie. (If you haven’t seen it and you like that sort of thing, take a look.) The description goes, “Space aliens come and destroy Washington, D.C. But later on, it turns out they are hostile.”

I think of that every time I look at the performance of the economy, which is recovering, and then read the headlines about the fiscal cliff negotiations, or lack thereof. There are certainly risks out there that could derail the recovery, but it’s maddening that the biggest one is our own government.

So the big story today is that the Federal Reserve is now explicitly linking its interest rates to U.S. unemployment. It’s kind of the reverse of the Santa revelation. Remember when you found out that Santa wasn’t real? How you kind of knew it but weren’t happy to have it confirmed? Now we kind of knew that the Fed was keying on unemployment, but again we’re not all that happy to have it confirmed.

The story made the front pages of the Financial Times, the Wall Street Journal, and the New York Times, in all cases above the fold. So in the eyes of the mainstream—and especially the financial—media, this is a big deal. I agree, for a change. The Fed has explicitly moved toward supporting the real economy, in employment, and away from supporting the financial economy, with inflation. Clearly, it is worried more about the former than the latter.

The primary story today is the imposition of restrictions on unions in Michigan, home of the United Auto Workers and once seen as a mainstay of the union movement. This news hit the front pages of the Wall Street Journal, with “Unions Dealt Blow in UAW’s Home State,” and the New York Times, with “Limits on Unions Pass in Michigan, Once a Mainstay.”

The story is important for the obvious reasons, such as the continuing erosion of worker power, but it is also important for some less obvious ones. Among these is that the erosion of wage bargaining power makes general price inflation less likely. A key driver of the out-of-control inflation in the U.S. during the 1970s was the wage-price spiral. At the time, wages were indexed to increase with prices, largely through union contracts, and the two fed each other in an increasing spiral. Today, as the membership and power of unions erode, wage-price inflation is becoming less of a worry for the economy as a whole.

Just a quick note regarding some of the more interesting things I have read recently.

I have spent quite a bit of time reading, thinking, and writing about the fiscal cliff, going into its potential risks and damage in some depth. While it’s certainly appropriate to analyze the situation, something occurred to me the other day: Could this be another Y2K?

You may remember it—the disaster that didn’t happen. Despite the predictions of nuclear power stations melting down and airliners dropping from the sky, the millennial New Year celebrations went just fine, and the world was still there the next day.

Recently, my posts have focused on the U.S., as that’s where most of the news has been, but I wanted to take a look at the rest of the world. Although nothing particularly urgent is happening, many issues we have discussed before continue to cook.

Europe

I have written before about the disconnect between consumers, who have been spending as if the fiscal cliff didn’t exist, and business, which has cut back. That disconnect is starting to disappear as consumers become aware of the cliff and what it could mean.

Consumer confidence showed a material drop at the end of last week, due largely to growing public awareness that after-tax incomes will take a hit if the cliff isn’t averted. Other factors included gas prices and the stock market, both of which hit the expectations component. Looking forward, if confidence stays lower, we can expect consumer spending to drop as well—a problem, as it has been a major sustaining element of the recovery. A front-page story in the Wall Street Journal, “Consumer Spending Wobbles,” notes that spending was slower over the summer than previously believed and has continued to weaken into the end of the year.

— Fred DeBaets

On Wednesday, we expect the Fed to announce the continuation of Treasury purchases to replace the current maturity extension program, better known as Operation Twist. The Fed will likely grow the balance sheet at a rate of $45 billion per month, maintaining the current pace of purchases. As for the time frame, our best guess is that the new program will end approximately six months prior to the anticipated rate hike, currently projected as mid-2015 by the Fed and early 2016 by the Fed futures market.

I have been writing about re-shoring for a while—most recently, yesterday. Today, front-page news in the New York Times and Financial Times, and front-business-page news in the Wall Street Journal, supports that theme in a big way. Apple has decided to start moving production of Macs back to the U.S.

The company plans to invest about $100 million to start manufacturing Macs here, beyond the assembly work it already does. Tim Cook, the CEO, explicitly says that he plans to work with partners to manufacture the full range of components in the computers.

Today, we will talk a bit about the cliff, but I wanted to lead off with recognition that, despite the short-term risks, there is still a lot of good out there, and the stories keep coming to prove it. A front-page article in the Wall Street Journal, “US Gas Exports Clear Hurdle,” and similar story on the front business page in the New York Times, “Exporting Natural Gas Has Merits, Study Finds,” both talk about a Department of Energy study, which concluded that exporting natural gas would be an economic plus, overall.

Such exports would help enormously with the trade balance; they would also create many jobs for people involved in constructing and operating the infrastructure to facilitate such exports. The costs would include the potential for higher prices domestically, as well as the possible erosion of a domestic cost advantage for manufacturers.