This is a second update on the economy with some thoughts on where we are in the business cycle. Yesterday, in my first update, I talked about monetary policy because of the upcoming Fed meeting in Jackson Hole. This time, I want to talk more about the political economy.
I think the headline mostly gets at what I am going to say. We are only seven months into Donald Trump’s presidency. And I think we can call it a failure. I’ll have a lot more to say on that momentarily. But I want to flag this as not being a dealbreaker for the US or global economy.
I think people put too much emphasis on the political economy in Washington. In some ways, it’s a sideshow since government obviously doesn’t dominate the US economy. Federal government outlays are just one-fifth of US gross domestic product. So even if a president’s economic agenda is sidetracked, delayed, or simply ineffective, it doesn’t mean the economy won’t keep chugging along.
At the same time, as emerging markets like China get bigger, the US economy recedes in importance globally. If you look at the global economy on a purchasing power parity basis – that is, holding purchasing power constant across economies – the US is only 22% of the global total. That’s less than one-fourth. So the US federal government is one-fifth of one-fourth then – which isn’t a whole lot.
But Donald Trump is failing. His economic agenda is failing. And I think his agenda isn’t just stymied or delayed. It will never come to fruition. And by that I mean that he is President of the United States because of economic pain in the American working class. You don’t get a serial bankrupted, inherited wealth reality TV star with no military or government experience as President unless something is seriously wrong with the economic fortunes in large swathes of the population. So Trump’s success or failure has to be judged on whether he delivers for his base – blue collar America.
Remember my post-election November post, “Donald Trump and the return of Rockefeller Republicanism”? Here’s what I was saying about Trump then:
“With the Republicans taking both houses of Congress as well as the Presidency, the potential for Trump to reshape the party in his image is immense. The question now regarding the Trump economic platform is how much he will bend to the will of the Republican establishment and how much will Trump remain focused on his blue-collar and middle class base of support.
“…If Trump wants to be successful, he will need to tend to his base and not the Republican establishment…
“…We are not at or near full employment as many economists will tell you. With the U-6 level of unemployment at 9.5%, it is at the top end of the range of unemployment for the last twenty years outside of the Great Recession…
“You would never hear anyone in Switzerland or Japan saying that 9.5% unemployment was near full employment. But you do hear Americans saying this. And the reason is they have given up on displaced middle class and blue collar workers. They think of these people as now being part of a permanent cadre of structurally unemployed people and write them off as targets for economic policy. Well, these happen to be the people who helped put Donald Trump into the White House. In fact a majority of white women voted for Donald Trump, despite his sexist remarks and female presidential opponent Hillary Clinton. That speaks to the distress in working class America as much as to the weakness of Hillary Clinton’s candidacy…
“A successful Trump who keeps his campaign promises would work with McConnell, Ryan, Sanders, and Pelosi to get an infrastructure bill through Congress. Meanwhile he would force US allies to increase their military spending and purchase of US weaponry while the US pares back its own defense spending. And finally, a successful Trump would cut the FICA tax that supposedly ‘funds’ social security, something that is both a cost for employers and for employees and therefore a highly regressive tax. Cutting business taxes or lowering the top tax bracket won’t get that job done. But those kinds of tax cuts will increase income inequality. Remember, the longer this economic cycle expands, the higher quality the jobs that are on offer will be. And that will be good for the middle class.
“A failed Trump who bought lock, stock and barrel into Republican orthodoxy would go back on his pledge to leave social security and Medicare alone and focus on privatizing or cutting social security as a way of lowering the deficit. And he would focus on killing TTIP and TPP or extracting the US from NAFTA.”
The President Trump we’ve seen so far is very much the failed Trump I mentioned in that post – and not at all the successful Trump. Tending to his bases cultural obsessions – like banning Muslims from entering the country or preventing Confederate statues from being removed – won’t do. It may feel good to the base to see Trump roll back some of the Obama era thinking, but that doesn’t put food on the table. Long-term, it’s his economic achievements that are going to matter. As I put it in February, If Donald Trump remains a cultural warrior, he will fail. And as we know most recently from Charlottesville, Trump has remained a cultural warrior – talking about the Wall, rolling back NAFTA and extracting the US fro TTIP. Even if any of these issues are economically beneficial for middle class Americans – which is debateable — none of this will deliver anything economically in the short or the medium-term.
In fact, I would argue that economically, the Trump Administration will have spent the lion’s share of its political capital in the first year on rolling back Obamacare and shutting down government over building a Wall on the US’ southern border with Mexico. And we know that the Obamacare rollback failed. All a Wall shutdown would do is create chaos and risk the US defaulting on its Treasury obligations – totally irresponsible.
Meanwhile, the Trump Administration’s tax proposals are on the backburner. With many in the Republican party talking about ensuring a tax bill is ‘revenue neutral’, there’s not going to be a bump in growth from deficit spending. Moreover, as I have heard the chatter, it isn’t even clear that any eventual tax bill will focus on relieving middle class workers of tax burden. Will Trump go along with this? Will a bill even pass? Let’s be clear: A tax reduction for Google and Apple of repatriated foreign earnings won’t help the middle class. Tax cuts for big business won’t help the middle class either. And even tax cuts for small businesses won’t help most people in the middle class. The only thing you get from these kinds of tax cuts is a trickle down effect. And trickle down economics is mainstream Republican thinking – the opposite of what got Trump elected.
To date, Donald Trump has absolutely no legislative achievements. And none of his economic agenda looks likely to come to fruition in 2017. Economically, the only thing making headlines now is his threat to shut down government over his Wall. As I said, this is utter and total failure.
But, not to worry, the US economy is still doing reasonably well. The economy grew 2.6% last quarter. And the Atlanta Fed’s GDPNow tracker is at 3.8% for this quarter. Even if that 3.8% number goes down, we’ll still be around that middling 2% yearly level that I have said US economic growth has been tracking. It’s not the 3 or 4% that Trump promised us, but it’s not bad either.
On the jobs front, the last jobless claims read was 232,000. The 4-week average at just over 240,000 is 23,000 lower than it was a year ago – meaning fewer people are getting laid off and claiming benefits. That’s a sign of a good job market.
And the U-6 unemployment level that includes people who are not looking for a job full-time and part-timers who want to be full-timers is at 8.9%. That is 0.8% lower than a year ago – very positive. A comment here though: 8.9% is lower than it was before, but it’s still pretty high. Now, I see this 8.9% number as the ‘real’ unemployment number because the change in structure of US employment has made the headline number less useful for comparisons across business cycles. When you look at the last cycle, the U-6 number got down to 7.9% in 2006. And it even got down to 6.9% in 2000. So 8.9% is not full employment by a long shot. It’s better but it shows continuing economic distress.
In sum, while Donald Trump, the cultural warrior, is failing as President on the economic front, not helping get us to the 3 or 4% growth he promised, he isn’t cratering the economy yet either. A US debt default or a military war could certainly change that though.
The US economy has been resilient. We are now back to 2% growth after a mid-cycle pause due to the (partial) bursting of the shale oil investment bubble. But, since we are in the ninth year of this economic expansion, you have to believe we are at the late stages of the cycle. That means we should be actively asking ourselves what the US economy would look like if a recession started in the next 12 to 24 months.
And that’s where my concern is. US households are spending beyond their means to sustain even 2% growth (see here and here). What happens when US consumers are forced to cut back? The hope has always been that tax cuts or wage increases would come before consumers do cut back. But nothing on the horizon shows this will happen. And Donald Trump’s ineffectiveness as President makes robust wage growth and tax relief for the middle class even less likely.
PS – The chaos in Charlottesville tells you that if you combined a failed Trump presidency with economic recession, you have the pre-conditions for some serious political extremism and revolt.