Tag: Economic Growth

Does Trumponomics Deserve Credit for Rising Optimism?

 

President Donald Trump’s overview of the budget priorities for Fiscal Year 2018 on its release by the Office of Management and Budget (OMB) in Washington, March 16, 2017. REUTERS/Joshua Roberts.

As I have been writing, fears of a stagnationary New Normal seem to have receded, at least for now. Just ask the booming stock market, right? Also ask the suits. “Leaders of the largest US companies are becoming more optimistic about sales growth, hiring and capital investment, causing a measure of chief-executive sentiment to increase by the most in seven years,” the Wall Street Journal reports.

The Economy’s Animal Spirits Are Growing Restless

 

I know for sure I’m not smart enough to invest based on the ebb and flow of “animal spirits,” nor predict the direction of the economy based on sudden changes in sentiment. But many people have been pointing to “animal spirits” as reason to be bullish, both on stocks and the US economy. Recall hedge fund manager Ray Dalio in mid-December:

Regarding economics, if you haven’t read Ayn Rand lately, I suggest that you do as her books pretty well capture the mindset. This new administration hates weak, unproductive, socialist people and policies, and it admires strong, can-do, profit makers. It wants to, and probably will, shift the environment from one that makes profit makers villains with limited power to one that makes them heroes with significant power. The shift from the past administration to this administration will probably be even more significant than the 1979-82 shift from the socialists to the capitalists in the UK, US, and Germany when Margaret Thatcher, Ronald Reagan, and Helmut Kohl came to power. To understand that ideological shift you also might read Thatcher’s “The Downing Street Years.” Or, you might reflect on China’s political/economic shift as marked by moving from “protecting the iron rice bowl” to believing that “it’s glorious to be rich.”

This particular shift by the Trump administration could have a much bigger impact on the US economy than one would calculate on the basis of changes in tax and spending policies alone because it could ignite animal spirits and attract productive capital. Regarding igniting animal spirits, if this administration can spark a virtuous cycle in which people can make money, the move out of cash (that pays them virtually nothing) to risk-on investments could be huge. Regarding attracting capital, Trump’s policies can also have a big impact because businessmen and investors move very quickly away from inhospitable environments to hospitable environments. Remember how quickly money left and came back to places like Spain and Argentina? A pro-business US with its rule of law, political stability, property rights protections, and (soon to be) favorable corporate taxes offers a uniquely attractive environment for those who make money and/or have money. These policies will also have shocking negative impacts on certain sectors.

Regulatory Reform as One Piece of the Growth Puzzle

 

I’ve grown increasingly skeptical of magic bullets, or silver bullets, or big-bang ideas to charge up the American growth machine. More likely it’s going to take lots of smaller-but-smart ideas all doing their bit to make the US more productive. That said, one area with potential is regulatory reform, as I pointed out yesterday with some encouraging comments about President Trump’s “one in, two out” executive order.

Still, just how much growth impact can be expected from regulatory reform on a number of fronts? What’s the potential here? The WSJ’s Josh Zumbrun offers a cautious, balanced take.

Broadly speaking, there are two approaches to estimating costs and benefits. A “bottom up” approach aggregates estimates for each individual regulation. A “top down” approach relies on economic modeling to show the overall effect of regulations on growth. The Office of Management and Budget already estimates the cumulative cost-benefits via an annual report to Congress. In its most recent report, OMB estimated regulatory costs of between $74 billion and $110 billion. The benefits of the regulations, however, were significantly higher: $269 billion to $872 billion. …

Trump’s “One in, Two out” Regulatory Reform Could Help Economic Growth

 

President Trump is employing what you might call the “Mad Max: Beyond Thunderdome approach” — “Two men enter, one man leaves!” — to regulatory reform, except sort of in reverse. If a new regulation is to enter the regulatory code, two must leave. Following through on a campaign pledge, Trump today signed an executive order requiring, as Reuters puts it, “that for every new federal regulation proposed, two must be revoked.”

A bit of typical Trump color on this:

This will be the biggest such act that our country has ever seen. There will be regulation, there will be control, but it will be a normalized control where you can open your business and expand your business very easily. And that’s what our country has been all about.… If you have a regulation you want, number one, we’re not gonna approve it because it’s already been approved probably in 17 different forms. But if we do, the only way you have a chance is we have to knock out two regulations for every new regulation. So if there’s a new regulation, they have to knock out two.

Should We Worry about America’s National Debt?

 

Of course, Ronald Reagan said the debt is big enough to take care of itself. Still, that headline question is the exact question I asked economist Ken Rogoff last November. From our exchange:

Rogoff: Well, obviously one question is at what horizon are we borrowing? So if you’re borrowing at 30 years, you can certainly carry – it’s a lot less risky than if you’re doing all quantitative easing and you’re borrowing at overnight interest rates when those can change on you very suddenly.

At Last She Moves, But How Many More?

 

yellenJanet Yellen and the Federal Reserve made next to no news at all with the announcement to move the Federal funds rate to the 0.5-0.75% range.  They had very well hinted at this in their meeting just before the election. The Federal Open Market Committee’s statement announcing the change showed very little change in its description of economic conditions — it changed the adjective describing growth from “modest” to “moderate.” As Bob Eisenbeis pointed out a few hours before the decision, the change does not seem to connect to actual economic conditions, so chances are they changed the word in order to justify what they’d already committed to doing. And as I said in my most recent post on Fed policy, they were committed to this move.

The Fed prefers to move when they have a press conference to explain themselves, and today was no exception. Because the Fed changed slightly its outlook for 2017, wherein it looks like the median of the Fed is to make three more increases in the Fed funds rate (to 1.25-1.5% by a year from now) from the two it forecast in September, Ms. Yellen had to explain that it was just a few people who moved. It’s also worth noting that the FOMC membership changes before the next meeting, as it does every year with the rotation of Fed presidents from the 12 regions. The next group coming in is known to have views that are more dovish (easier money) than the group about to depart. Listening to the press conference, I thought Yellen was trying very hard to tell us not to get hung up on three. Perhaps it’s because she is in the two-increase camp.

I thought the press conference attendees did a good job pressing Ms. Yellen on some points. On the Trump presidency, there was a silly question about Twitter. She waved this off with reference to the Fed’s independence — what else could she say? But the more interesting questions concerned fiscal policy and whether the Fed would take a non-accommodative stance in response to easing. There’s been much chatter in the econ and finance blogs about this and it’s mostly rubbish. On expansionary fiscal policy, ever the Keynesian, Ms. Yellen said we needed fiscal stimulus a few years ago when demand was slack, but not so much now. But when pressed on this by two different reporters, she did relent that fiscal policy which improved productivity would be welcome, would encourage real growth, and would allow interest rates to rise without choking off an expansion.

On Fiscal Stimulus, Yellen Is “Meh,” While Trump Is “More!”

 

yellen-trumpThere seems to be an economic disagreement between the current Fed and the future White House. The central bank on Wednesday raised its benchmark short-term interest rate for the first time in a year, with perhaps three more moves in 2017. And at the post-meeting press conference, Fed boss Janet Yellen was kinda-sorta “meh” on the idea that the US economy needed a big dose of fiscal stimulus. It probably did a bit earlier in the recovery, but not now.

Here’s Yellen:

I believe my predecessor and I called for fiscal stimulus when the unemployment rate was substantially higher than it is now. With a 4.6% unemployment and a solid labor market, there may be some additional slack in labor markets but I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not obviously needed to provide stimulus to get back to full employment.

Why China Will Never Be as Wealthy as America

 

Hong KongAs a candidate, Donald Trump expressed envy for the brilliance of China’s leaders and the fast pace of China’s economic growth. But the reality of China today doesn’t merit envy from an American president. As my AEI colleague Derek Scissors recently noted, some data suggest China’s economic importance to be falling — certainly relative to that of the United States.

For example: There is a massive gap between American and Chinese private wealth, according to Credit Suisse estimates, of more than $60 trillion and growing. Scissors: “The once-fashionable question of when China will pass the United States in economic size has given way to wondering if it will ever happen. The answer is, not for decades and probably never.”

But the wealth gap alone doesn’t explain being pessimistic about China. To complete the analysis, one needs to mention how China has stopped moving toward a more market-driven economy. Call it crony capitalism, corrupt capitalism, or state capitalism — it’s not competitive-entrepreneurial-innovative capitalism. As Scissors recently said in the South China Morning Post, “This government talks of reform, but protects poorly operated state-owned enterprises and remains hostile to market-based competition.”

Is the American Dream in Trouble? And If So, Is the Answer Opportunity or Redistribution?

 

stallingIn 2014 researchers had some reassuring news about whether America was still the Land of Opportunity. As the New York Times characterized the findings, “The odds of moving up — or down — the income ladder in the United States have not changed appreciably in the last 20 years.” So a pleasant surprise — of course it could be better — on the issue of relative social mobility. Stable was the new up.

But what about absolute mobility? It’s a slightly different question. Do kids earn more than their parents? Here, according to new research from the same group, the findings are disheartening. From the Wall Street Journal:

Economists and sociologists from Stanford, Harvard and the University of California set out to measure the strength of what they define as the American Dream, and found the dream was fading. They identified the income of 30-year-olds starting in 1970, using tax and census data, and compared it with the earnings of their parents when they were about the same age. In 1970, 92% of American 30-year-olds earned more than their parents did at a similar age, they found. In 2014, that number fell to 51%. … The percentage of young adults earning more than their parents dropped precipitously from 1970 to about 1992, to 58%, found Mr. Chetty and David Grusky of Stanford University, Maximilian Hell, Nathaniel Hendren and Robert Manduca of Harvard University and Jimmy Nrang of the University of California at Berkeley. The percentage steadied for around a decade and plunged again starting in 2002, according to the economists.

Give Steven Mnuchin a Break: Much Faster Growth Is Possible During the Trump Presidency

 

120116growth

I certainly get the skepticism — bordering on mockery — toward this statement from Steven Mnuchin, Donald Trump’s Treasury secretary pick, on CNBC yesterday: “Let me just say our most important priority is sustained economic growth, and I think we can absolutely get to sustained 3 to 4% GDP and that is absolutely critical for the country.”

In response, ace Washington Post columnist Catherine Rampell tweeted: “sustained 4% growth, guys! got a bridge to sell you, too.” Indeed, I offered plenty of snark during the GOP presidential primary season when Jeb Bush made hitting a 4% growth target a key campaign policy plank. This blog post, for instance: “Why Jeb’s 4% growth goal might require the Singularity.”

Trump’s Econ Plan Offers Some Promise — with Plenty of Risk

 

Trump wavingThe incoming Trump administration doesn’t seem the sort much concerned about “consensus” economic opinion or what so-called experts think. For instance: One recent survey of top economists found 93% disagreed with the notion that Trump’s 100-day economic plan would help middle-class workers. (“Even if we no longer import from and offshore to China and Mexico, manufacturing jobs won’t come back. If they did, they would before robots,” opined one.)

But you take your friends where you can find them. Such as at the OECD, the rich economy think tank. In a new report, it had nice things to say about Trumponomics: “The new Administration will begin implementing its policy priorities next year and in this context the fiscal stance is projected to become more expansionary as public spending and investment rise, while taxes are cut. This will provide a boost to the economy, particularly in 2018.”

Not bad! A couple of thoughts here. First, keep in mind that this economic boost is more about near-term stimulus rather than lifting long-term growth potential through supply-side structural reform. The latter would only show up later. Still, faster growth would be welcome, all else equal. The OECD expects the likely size of the stimulus would boost US economic growth to 2.3% from 1.9% in 2017, and to 3% from 2.2% in 2018. Hardly the hypergrowth Trump has promised, but better.

A Few Ideas on the Entrepreneurial Way to Faster Economic Growth

 

MoneyI have some problems with “The Entrepreneurial Way to 4% Growth,” a Wall Street Journal op-ed. First, I think the headline overpromises what better policy can achieve over the longer term. (At least if you assume government productivity stats more or less have things correct.)

First, increase economic growth. More businesses start when GDP expands at 4% rather than 2%. Existing businesses look for new markets, often turning to young companies for innovative ideas.  … Mr. Trump should also focus less on Silicon Valley, which already receives disproportionate attention from Washington. This sliver of the nation’s entrepreneurs—high-tech companies and the venture-capital investors who fund them—has shaped the narrative of entrepreneurship for too long.  … Government must also widen the scope of innovation by stepping back and letting the market find the future. By promoting trendy ideas and subsidizing politically favored companies, government dampens diversity in creative business ideas. … The new president must also make it possible for local banks to get back in the business of financing startups. For 200 years, community lenders were the principal source of capital for startups. … Mr. Trump can also reverse regulatory sprawl and cut government-imposed requirements that add to every entrepreneurs’ costs and risks.

Not that any of that stuff is bad. But nothing here is unexpected. Of course policy ideas don’t need to be novel. Nor does originality necessarily equate with effectiveness. Yet I think some good ideas are missing (although they may be found within more general prescriptions, I guess). Among them: a) boosting (very) high-skill immigration, b) fighting anti-growth housing and building policies in high innovation cities, c) labor market reforms such as limiting non-compete agreements and lessening the burden of occupational licensing.

Will Trumponomics Make the American Economy Great Again?

 

Forecasting the possible economic impact of a sweeping economic plan is tough. So many moving parts. It’s even tougher if you aren’t quite sure what those parts are. Which brings us to Trump-onomics. Goldman Sachs has taken its best shot, given the above caveats.  This is its central policy case:

We expect scaled-down versions of the tax reform and infrastructure policies to be enacted. We do not anticipate significant changes on immigration policy, but incremental restrictions seem likely. Mr. Trump’s monetary policy views are still unclear, but slightly more hawkish appointments appear likely at this stage. Trade policy is the greatest unknown, but we expect that Mr. Trump would follow through on at least some of the trade policies he has outlined.

October Jobs Report: Is the US Economy “Basically Healthy?”

 

05onfire1_xp-master768-v2The October jobs report contained lots of good news. Even though the 161,000 increase in nonfarm jobs was a bit shy of expectations, it came with a 44,000 upward revision to August and September data. This is longest streak of total job growth on record, as American businesses have now added 15.5 million jobs since early 2010.

Perhaps the brightest spot was the wage data. The 0.4% increase in average hourly earnings last month nudged the annual growth rate up to a seven-year high of 2.8%, from 2.7%. More from First Trust Advisors: “Total hours worked increased 0.2% in October and are up 1.5% in the past year.  Combined with the earnings data, this means, total cash earnings (which exclude fringe benefits and irregular bonuses/commissions) are up 4.4% in the past year, which is plenty of fuel to push consumer spending higher.”

And RSM US economist Joseph Brusuelas notes that, “for the first time since prior to the 2007-2009 Great Recession wages are rising for the two lower quintile of income earners.”

The Real Reason the US Economy Seems Stuck in Slow-growth Mode

 

index

What to make of the above chart? Its creator, Congress’ Joint Economic Committee, offers an opinion on what it calls the “new normal” or persistent economic stagnation:

The United States is in the midst of the most lackluster economic recovery in modern American history. Eight years of economic stagnation has cost the median American family a cumulative $69,000 of income. In addition, effective tax rates on American businesses remain among the most burdensome in the world, and the Obama Administration continues to increase regulations at a record pace. Furthermore, the Administration’s Keynesian approach to economic stimulus has failed to promote strong, sustainable economic growth….

Immigrants and American Economic Dynamism

 

imm_jp-e1475515845793In the Harvard Business Review, Sari Pekkala Kerr and William Kerr write, “Global talent flows will continue to be a fundamental force shaping the U.S. economic and business landscape. This is especially true for entrepreneurship given the economic dynamism that startups unleash and the disproportionate role of immigrants in this process.”

And among their findings (some of which are reflected in the above chart):

1. Immigrants constitute 15% of the general U.S. workforce, but they account for around a quarter of U.S. entrepreneurs (which we define as the top three initial earners in a new business). This is comparable to what we see in innovation and patent filings, where immigrants also account for about a quarter of U.S. inventors.

Trump Wants 4% (or Higher) US Growth. Easy. Just Massively Increase Immigration.

 

RTSNSRU_trump-e1474041425357Donald Trump has high hopes for his economic plan. From CNBC:

Donald Trump thinks American GDP can grow more than 4 percent under his policies, more than double the average rate the U.S. has seen in this century. “My great economists don’t want me to say this, but I think we can do better than that,” he said Thursday in a speech to the Economic Club of New York. Earlier Thursday, his campaign said in a fact sheet that its planned tax cuts and deregulation will boost average annual GDP growth to 3.5 percent and “create as many as 25 million new jobs” in the next decade. The U.S. economy grew at roughly 2 percent in 2015 and last grew at a 4 percent annual rate in 2000.

There are a number of problems with this 4% goal.

Hey, Incomes Surged Last Year. It’s OK to Be Happy!

 

Well that’s more like it — even if it is just one year. US median household income, adjusted for inflation, was $56,500 in 2015, 5.2% above its 2014 level. It was the largest jump in incomes since 1967 when the Census Bureau started releasing such data.

What’s more, the gain was the first statistically significant increase since 2007 — although incomes still remain 1.6% below that pre-recession level. Job growth and rising real earnings growth (a combo of higher hourly earnings and hours worked) is finally paying off.