Saturday, June 24, 2017

Sagging Hopes for Trump’s Growth Plans

By Roy C. Smith

Trump-drama may be obscuring an important reality – the US is still stuck in a 2% growth mode with little relief in sight. The real culprits may be the professional politicians of both parties.
Since Mr. Trump’s election there has been strong market rally, and the economy has recovered to the point that Janet Yellen in April proclaimed it “pretty healthy,” thanks in part to the Fed’s long-running stimulus campaign, which it is moving to end. “Looking forward, I think the economy is going to continue to grow at a moderate pace,” she added. Financial markets seem to agree with her.
Her upbeat comments were made just after the first quarter GDP growth of 0.7% was announced. This less-than-moderate figure has since been revised to 1.1%.  A WSJ poll of economists now puts the consensus expectation for 2017 growth at 2.3%, with most saying the risk is on the high side. Forecasts for 2018 average 2.4%
Growth in the low 2’s is a long way from the 3% forecasted in Mr. Trump’s 10-year budget proposals, the result of his bold new economic policies. Lifting the US growth rate to the 3% level would almost bring it back to the long-term 3.3% rate enjoyed in America from 1950-2000.
Indeed, falling below that level to a 2.0% average growth rate for the 16.5 years since 2000 is what has hardened up the economic discontent that has coursed through the American electorate, empowering such extreme, outlier figures as Mr. Trump and Senator Bernie Sanders.
But six months into Mr. Trump’s administration, there is little in his economic policies that seem able to make the big jump to 3%.  His trade and immigration polices are actually inconsistent with growth in our fully globalized economic system with a shrinking labor force.  (Both of these policy initiatives have generated enough resistance to suggest that significant dilution in them will be needed to put them into effect).
Other policies (health care, tax and banking reform, government spending cuts but military and infrastructure increases) aim to provide a job-boosting stimulus effect financed by increased debt. Because the budget forecast assumes higher tax revenues from the 3% growth rate the net deficit result is supposed to be minimal, but it is hard to see how the proposals (even if sound economically) could generate that much new growth in a full-employment economy with low inflation and aging demographics. It might just produce inflation instead.
The economic plan is to be accompanied by executive orders that will reverse some Obama administration policies, and deregulate where it can. So far these orders have mainly been staged political events requiring new studies or extra efforts to be more efficient.  Even so, when the administration is fully staffed, which it is far from now, we have to assume that newly appointed regulators would undo what they can.  A 2013 study by The American Enterprise Institute concluded that the aggregate economic cost of regulation in the US since 1949 -- i.e., the total cost of compliance and reduced investment -- led to a 2% average annual reduction in U.S. GDP growth. Not all of this regulation is federal, or bad, but there is certainly room for some of it to go. However, how much of it might be unwound by the Trump administration without legislative changes is unclear.
Anyway, the combined Trump economic program, as we now see it, does not appear likely to affect the GDP growth rate very much in the near term. Other administrations have learned how hard it is to boost growth when you need it.
But most important, Mr. Trump, even with a Republican majority in both houses of Congress is unlikely to get what he wants because he won’t be able to pass it through Congress. His own party has balked at a replacement for Obamacare, producing House and Senate bills that seem cruel to most Americans. It is hard to guess what, if anything, is likely to get passed by a Congress as chronically divided as this one is, especially when it operates on a strictly partisan, cram-down basis with no support at all from the Democrats.
Tax reform, infrastructure spending and financial reforms all have been pushed back, perhaps until next year during a Congressional election campaign. These will involve increased government borrowing, and some of Mr. Trump’s fellow Republicans, fearful of the increasing government debt ceiling and perilous debt-to-GDP ratio (now at the highest level since WWII), are likely to resist his budget plans. Others may fear that supporting Mr. Trump’s economic plans that harm the middle class could endanger their support at home. Most observers, however, believe that some, watered-down version of Mr. Trump’s proposals will get through.
By now, most of America’s “establishment” community of business and civic leaders (the ones who have run the country in the past) have now recognized the Trump phenomenon for what it is – an accidental political event that sprang from serious economic deceleration and imbalances, and realize that the best they can do is ignore what Mr. Trump has to say (and tweet) and just watch what he does.
So far this has been much less radical and dysfunctional than what was promised during the campaign. Mr. Trump is still a controversial figure with only around 40% support, and much of that is still based on the idea that he will shake things up for the better. If this doesn’t happen, and at this point it seems unlikely that it will, then Trump and his party may be in big trouble when they seek reelection. 
That of course will also depend on whether new leaders of the Democrats, with more deliverable economic programs, can be found. So far, none has emerged but there is still plenty of time.
But for good, deliverable economic policy to be put in place major efforts to rethink what our competing political parties really want to stand for are required.
Both parties need to broaden their political bases and not rely only on the narrowest, most extreme factions. Both parties need to support economic growth as the best way to create opportunity and prosperity for all.
A large part of the American electorate believes it has been left out by policies that have favored the well to do. This group has been persuaded of the evils of globalization, deregulation, and incentive compensation schemes that are necessary to keep the private sector that generates two-thirds of our economic growth and employs 85% of all US workers in a healthy state.
Both parties also need to recognize that 47% of Americans paying no federal income taxes means that they don’t earn very much and are far from participating in the American Dream. That is too large a segment of our society to be left behind. As a trade off for allowing the private sector the freedom it needs to resume a 3% growth rate, there also have to be public policies that provide job retraining, and insure adequate health care and retirement income.
Blusterous and ill informed or not, Mr. Trump cannot really govern without a political base of both parties that is broader and more moderate than what we have now. That may be the real lesson of the Trump era.

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