Trump and his advisers have suggested we could get to 4, 5 (do I hear 6?) percent growth. No semi-respectable economist buys that. And in truth, as fiscally irresponsible as the tax bill may be, it is unlikely to provide enough of an economic jolt to change the trajectory of the economy over the long haul. We continue to have modest growth. Trump has not and is not likely to pursue policies that would address the underlying causes of sluggish growth (stagnant productivity) or pursue pro-growth policies in a systematic way (e.g. increase immigration, expand free-trade zones, make substantial investments in worker training and education). In other words, we’ve been promised champagne but should get ready for flat ginger ale.
We got a preview of that with today’s growth numbers. The Wall Street Journal reports:
The U.S. economy grew steadily in the fourth quarter, losing a bit of momentum from the summer but mustering enough strength to extend one of its best stretches in recent years.Gross domestic product—the value of all goods and services produced in the U.S., adjusted for inflation—rose at an annual rate of 2.6% from October through December, the Commerce Department said Friday. Economists surveyed by The Wall Street Journal expected a 2.9% reading.Output grew slightly above 3% in the second and third quarters.
The latest growth—driven by solid increases in spending by American consumers and businesses—capped the economy’s best year since 2014. Output grew 2.5% in the fourth quarter compared with a year earlier. It rose 1.8% in 2016 and 2% in 2015.Last year ranks as the fourth-best calendar year of growth since the expansion began in mid-2009. Growth has averaged slightly above 2% this decade.
That’s perfectly respectable, a sign that the economy is humming along but certainly not revving up into high gear. And that’s a problem, since Trump once again has over-promised. (“The big question now is how long the latest pickup can be sustained. Few economists expect the economy to sustain a 3% rate—President Donald Trump’s goal—in the long term, given an aging population and meager productivity growth.”)
The hype — in part induced by a stock market boom, echoed by Trump’s supply-side cheerleaders — has become a handicap. The economy isn’t in recession, provides near-full employment and suggests no breakout of inflation. That’s essentially the Obama economy he inherited. When President Barack Obama was in office, everything was terrible, awful, the worst, Trump told us. We were losing. So what is it now?
Trump defenders say deregulation efforts will boost the economy. Well-designed regulatory changes over the long haul could be helpful (e.g. ones that cut permit times for infrastructure projects), although Trump’s changes are not necessarily pro-growth (e.g. “buy American,” letting employers grab food servers’ tips) and their impact has been — you guessed it — exaggerated. (“Of the 14 bills the president has signed to unwind Obama-era rules, only three could be quantified for a cost savings of $500 million to $1.1 billion . … For the remaining 11 legislative actions, they were ‘not quantifiable,’ [an Office of Management and Budget] official said.” A few billion in business savings in an $19.7 trillion economy is pocket change.) But if you are promising a whole new, supercharged, never-seen-growth-like-this economy, regulatory fixes aren’t going to get you there, and reality is going to seem like failure.
But the tax cut! Well, that might turn out to be just another expensive box of cruddy chocolate. The Wall Street Journal’s survey of 60 economists forecasts 2.5 percent growth this year. The Federal Reserve agrees. In other words, the cotton candy, rainbows and unicorns aren’t coming; Trump does not have a magic formula.
Politically his support is at historic lows at a time when economic confidence is exceptionally high. When Trump’s grand promises don’t pan out, do consumers lose confidence and does Trump’s approval go even lower? Stay tuned.
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