With the caveat that surprises, of course, abound, here are five issues I expect to loom large in the 2018 political economy.
Attacks on the safety net. Key Republicans, especially House Speaker Paul D. Ryan (Wis.), have made it clear that cutting social insurance and safety net programs is their primary goal this year. (President Trump’s made some noise about infrastructure, but I don’t see it; there’s no real plan and little appetite among his caucus for more spending.) Senate Majority Leader Mitch McConnell (Ky.) has thrown cold water on cuts to Medicare or Social Security (or, as they call it: “entitlement reform”), but that doesn’t mean they won’t go after poverty programs.
Along with cutting spending, one of their main arguments will be for adding work requirements to Medicaid and nutritional support (food stamps, or SNAP). This is substantively misguided, as the majority of working-age, able-bodied recipients are of course connected to the job market (“of course,” because you can’t support a family on health coverage and $1.40 per meal). For example: “Among SNAP households with at least one working-age, non-disabled adult, more than half work while receiving SNAP — and because many workers turn to SNAP when they are between jobs, more than 80 percent work in the year before or after receiving SNAP. The rates are even higher for families with children.”
But this was never about facts and figures. It’s about the ideological crusade to reduce government by shifting tax revenue from the Treasury to the wealthy and cutting spending on vulnerable populations.
Jobs and wages. Meanwhile, over in the real economy, the story continues to be positive. A virtuous cycle of strong labor demand is generating rising pay and incomes, which in turn fuel consumer spending that makes up about 70 percent of the U.S. economy. Wage gains have been less than expected given the low unemployment rate, but that’s probably because there’s still slack left in the job market, as is implied by how inflation has remained low.
I expect unemployment to fall even further this year, below 4 percent. If so, I further expect such a truly tight job market to provide workers with more bargaining clout than they’ve had in recent years, which should generate faster growth in real paychecks. If I’m right, that invokes the next two 2018 issues:
First, how will the newish Federal Reserve respond to this? According to its most recent analysis, the consensus at the Fed is that the lowest unemployment rate consistent with stable inflation is 4.6 percent. That’s a half-point above the current rate. That inflation remains quiescent has them scratching their heads, for sure, but they’re still raising interest rates based on their conviction that faster inflation is hiding around the next corner and they’d better not get “behind the curve.”
The new chairman of the Fed, Jerome Powell, takes the helm in early February, and the conventional wisdom, with which I concur, is that he will be intent on managing a smooth transition with no policy surprises. That said, trust me, if unemployment falls to the mid-threes and they start to see some serious wage and price accelerations, they’ll speed up their plodding rate-hike campaign.
Second, the economy and the tax cut. My 2018 agenda is already in place. When I’m taking a break from trying to block destructive cuts to the safety net, I’ll be arguing that every good data point is not an obvious function of the tax cut. If wages do accelerate, trickle-downers will go nuts, but they’ll need to show the gains link to faster investment, generating faster productivity growth, which trickles down to wages (they’ll also need to explain why the budget deficit is going up, because they assured us the growth-inducing tax cut would pay for itself). That’s a very different wage-growth dynamic than the one I’ve described above, wherein full employment boosts workers’ bargaining clout.
Wherefore the bull market in stocks? Equity markets had a strong 2017, and not just here in the United States. The Standard & Poor’s 500-stock index was up 19 percent; the global index was up 22 percent. So, to state the obvious, this isn’t Trump. U.S. markets are up on corporate profits that are already historically high and, as the per the tax cut, are probably going higher (even if pretax corporate profits stagnate, after taxes, they’ll rise).
How sustainable is this run-up? Price-to-earnings ratios are historically elevated, but less so when you consider: a) high profitability, realized and expected; b) low inflation and interest rates (signaling no overheating); c) a rare period of synchronized global growth; and d) no obvious evidence of any speculative bubbles, outside of bitcoin, which isn’t systemically connected to the real economy or credit markets.
What’s this have to do with politics? Team Trump will continue to mistake the stock market for a report card, and it will, at some point, give them an F (i.e., crash). More importantly, most people yield little from the bull market, as 84 percent of its value is held by the richest 10 percent. To the extent that higher corporate profits and share prices continue to drive wealth inequality to historical highs, do not expect these trends to be celebrated by households that depend on paychecks.
These are some of the developments I’m sure to be tracking in the coming months (along with the ongoing attack on workers through regulatory changes). So, fasten your seat belts. I’m hoping the ride is less bumpy this year than last, but unexpected turbulence is to be expected.