The energy fueling the presidential campaign — on both sides of the political spectrum — seems to be a deep despair about the U.S. economy. On this central issue, Bernie Sanders and Donald Trump have a surprisingly similar message: The American economy has failed.
But is the analysis correct? The U.S. economy has created 14 million private-sector jobs since 2010. Unemployment has dropped to under 5 percent, and the number of people filing jobless claims hit a 42-year low last year. The Dow Jones industrial average has more than doubled under Barack Obama, among the strongest stock market performances under any president. Housing and construction markets are strong, auto sales are booming, and even wages have begun to rise.
The central dilemma for the United States is that the gains from growth, low inflation and technological productivity are spread broadly across the entire population. We all gain from lower-cost goods and extraordinary technology. But the costs — the jobs lost, the wages cut — are concentrated among a smaller group of people. It is the voices of these people, understandably angry, that we hear on the campaign trail these days.
The present recovery has been much less robust than previous ones. But many economists predicted this from the start, pointing out that slowdowns caused by a financial crisis batter the confidence of consumers and businesses. The most relevant metric surely is how the United States has emerged from the recession compared with the world’s other major economies. And on this the evidence is clear. The U.S. economy will likely grow much faster than the euro zone’s and almost three times as fast as Japan’s this year. In the United States, the Federal Reserve has started to raise interest rates because it worries about growth producing inflation, while almost every other major central bank in the world is thinking of cutting rates to try desperately to jump-start the economy.
On the Republican campaign trail, one of the ritual denunciations you hear is that the Obama administration has strangled the economy with new regulations. The centerpiece of that argument is the Dodd-Frank law, a vast, complex and unwieldy set of regulations that now govern the financial industry. And yet, as the Financial Times reported this week, America’s top five investment banks took in more than twice as much money as their European counterparts, beating “their European rivals on almost every financial measure last year.” Their cumulative pretax profits were $33.5 billion, eight times those of the European banks. “It is the latest illustration of the growing global dominance of the U.S. investment banks,” the Financial Times concluded.
The argument that the economy would grow faster if there were major tax and regulatory reforms is certainly plausible in theory. But the United States is actually a very competitive economy. A recent UBS report for the World Economic Forum identified the countries best able to take advantage of the “fourth industrial revolution,” and America ranked fifth.
It’s certainly true that the United States has problems with unwieldy tax and regulatory systems. In rankings recently released by U.S. News & World Report, in the “open for business” category, the United States clocks in at a shocking 23rd. But there is a growing consensus among business executives and economists that the current circumstances are unusual, almost unique, with people and companies hoarding their savings, wages depressed, inflation nonexistent and a real danger of deflation.
In an essay in Foreign Affairs, two senior executives at Blackstone, J. Tomilson Hill and Ian Morris, point out that the evidence from Europe is now clear: Those countries that undertook substantial structural reforms, such as Greece and Portugal, have not been rewarded with economic growth. “Pro-market reforms have not corresponded with strong economic recovery,” they write.
In the same issue of Foreign Affairs, Lawrence Summers, the former president of Harvard University and former U.S. treasury secretary, carefully explains why the fundamental problem in the economy is a lack of demand (too much savings, too little spending) and advocates as the single, central solution a major boost in infrastructure spending. Summers has pointed out elsewhere that, as in a house, deferred maintenance simply ensures you have a much larger bill when things actually break down. Better to borrow money at historically low rates and spend it now to boost growth and kick-start a virtuous cycle of demand. “Future generations will be better off owing lots of money in long-term bonds at low rates in a currency they can print than they would be inheriting a vast deferred maintenance liability,” he writes.
From what they have said repeatedly about infrastructure on the campaign trail, it appears that Donald Trump and Bernie Sanders would agree with much of this. Could this be the start of a bipartisan pro-growth agenda for America?