Has Trump made the economy great again?
When he's not blaming everybody else for his failures, Donald Trump likes to boast that the U.S. economy is taking off under his leadership, butdoesn't think so.
THE U.S. stock market has been on a tear since the presidential election, with both the Dow Jones Industrial Average and S&P 500 indexes of stock prices hitting record highs on the strength of an over 10 percent increase since November 8.
The conventional wisdom on Wall Street was that the election of billionaire dealmaker Donald Trump would be a boon for business, and the prospect of more tax cuts and major regulatory rollbacks was unleashing the economy's "animal spirits."
But the boom hit a bump in late March, with the Dow registering its first one-day declines of more than 1 percent in nearly half a year.
The reason: The failure of Trump, House Speaker Paul Ryan and the Republican leadership to push through legislation to "repeal and replace" Obamacare raised doubts about whether the new administration would accomplish anything. Trump's ability to get things done will stay at the forefront of investors' minds," Katie Nixon, chief investment officer at Northern Trust Wealth Management, told the Wall Street Journal.
Of course, what "investors" think of Trump has nothing to with the health of the U.S. health care system or the conditions of working people--and everything to do with the health of the balance sheets of big Wall Street banks and institutions that dominate the stock market.
The wider question for us is whether the stock market exuberance since November means the U.S. economy is ripe for the takeoff that Trump promised during his election campaign and bragged about repeatedly since he moved into the White House.
Trump claimed his policies would turbo-charge the economy to grow at a 4 percent annual increase in gross domestic product, more than double recent growth statistics since the end of the 2008-09 economic crisis.
For a few months after the election, this "economic confidence trick," as the Journal's James Mackintosh dubbed it, appeared to work.
Despite all of the media focus on the "white working class" as Trump's base, in reality, the core of Trump's vote was the conservative middle class, including small business owners and the self-employed.
So it should be no surprise that optimism among small-business executives is near a 43-year high, according to surveys. Polls of corporate CEOs have also hit new highs. In January, the University of Michigan survey of consumer confidence reached a 13-year high.
These rapid upward changes in outlook have opened a gap between economic indicators based on "soft" data, like small business "optimism," and "hard" data, like figures tracking sales and profits.
So, for example, the New York Federal Reserve Bank's "Nowcast" economic forecasting model predicts the economy will grow by 2.8 percent in the first quarter of 2017. The Atlanta Federal Reserve's "GDPNow" tracker indicates growth of only 0.9 percent in the first quarter.
Why the difference? The New York model places more emphasis on results from sentiment surveys, while the Atlanta model relies more on hard data. "Hard data have been on balance weaker than the sentiment surveys for the last several months," wrote the Wall Street Journal's Paul Vigna.
Even Federal Reserve Chair Janet Yellen said that hard data have not "noticeably strengthened"--though she and her colleagues nevertheless have decided to gradually raise interest rates, a policy tool meant to moderate an accelerating economy.
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Real Change or a Mirage?
The first thing to say is that the U.S. economy is in a far superior position for Trump's first months in office compared to 2009, when Barack Obama took over after the near-meltdown on Wall Street and an international economic crisis worse than any since the 1930s.
Even though economic growth has been sluggish, the U.S. economy has expanded by about 17 percent since the low point of the recession in 2009, after accounting for inflation.
Official unemployment stands at 4.7 percent, down from nearly 10 percent at its peak level in October 2009. The percentage of workers "marginally attached" to the labor force or employed part time for economic reasons declined to 9.2 percent from a high point of 17.1 percent in late 2009. Initial jobless claims are way down, hovering around levels last seen in the early 1970s.
The most recent Labor Department employment report, issued in early March, noted a year-over-year increase in average hourly wages of 2.8 percent. So wages are trending up and are growing faster than the overall economy. This signals a fairly strong job market, at least compared to the last decade.
So increased jobs, and the incomes that come with them, may be the reason for the higher consumer confidence readings, not to mention "harder" indicators such as the increases in new home sales.
But all of this "good news" has to be placed in perspective. While these figures show the economy has recovered strength since the Great Recession, they are fair-to-middling from a longer-term perspective.
Take, for example, unemployment. The official jobless rate stands close to where most economists say the economy is at "full employment."
But the official statistic calculates unemployment based on an estimate of the percentage of the population in the workforce. That figure stands at 63 percent today. In 2007, before the Great Recession, it was 66 percent. While some of this decline represents demographic changes, such as older workers retiring, it also represents millions dropping out of the labor force.
And the relatively strong job market by official statistics doesn't document the quality of jobs.
"Alternative work arrangements"--where workers are treated as "independent contractors" or otherwise not guaranteed steady employment with full wages and benefits--have increased significantly in the last decade. And most of the jobs created in the current recovery are in the service sector, which pays lower wages.
At 2.8 percent, year-over-year increases in hourly wages are moving in the right direction. But before the recession, in 2006 and 2007, wages were increasing at rates of 3.5 to 4.5 percent year-over-year. Meanwhile, median annual household income, though rising since it bottomed out in 2012, still hasn't recovered to the level of 2007, or 1999--the high point reached in the last 30 years just before the previous recession.
In other words, these "hard" indicators show the U.S. economy in better shape than it was, but still not great--at least from the point of view of most workers, who still haven't recovered from the "lost decade" since the 2007-08 recession.
Even with home sales increasing, they lag far behind decades' long trends, and overall home ownership has declined to 63.5 percent--from more than 69 percent at the height of last decade's housing bubble, and the long-term non-bubble rate of about 66 percent.
Other troubling indicators--from the closure of hundreds of outlets for Sears, K-Mart, J.C. Penney and other retailers where millions of working people shop to increased defaults on student loans--show that millions of working people continue to face difficult conditions in their day-to-day lives.
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Will the Trump Program Help?
When he was on the campaign trail, Trump promised that a combination of business-oriented tax cuts and massive infrastructure spending plan would jump-start the economy and produce good jobs for U.S. workers.
Like most Trump promises, these aren't worth much. But if we assume that Trump follows through on them--and that he can get them implemented, which is no certainty given the incompetence of his administration so far--will they have the desired effect?
The answer depends on what you mean by "desired."
Let's look at three aspects of Trump's program: a corporate "tax holiday," further cuts in corporate and income taxes, and a plan for infrastructure spending.
The first proposal, for a tax holiday, has been kicking around Washington for long before Trump came into the picture.
The basic idea is to reduce the tax rate on corporate profits to only 10 percent for the more than $2.6 trillion that U.S. corporations are holding in overseas accounts, if this wealth is "repatriated" to the U.S.
That's a pretty good deal if you're a CEO, but would Trump's plan result in this money flowing into corporate expansion and new jobs? If the experience of a similar plan passed during the George W. Bush administration is any guide, the answer is no. "That proposal had provisions to force companies to invest cash domestically in order to qualify for the tax cut, but companies figured how to work around the restrictions," wrote David Brodwin of the Sustainable Business Council.
What's more, Brodwin continues, corporations only park their profits in banks in offshore tax havens or low-tax states like Ireland. Those profits are already being used to finance business in the U.S., so it's unlikely that giving the corporations a big tax break will result in a big boom in investment.
Absent that, any tax benefits for U.S. corporations will end up being returned to shareholders in the form of stock buybacks and dividends.
What about Trump's plans to cut taxes on the rich, including permanently lowering the corporate tax rate? This is another one of those elements of conservative theology that has very little empirical support. As the Marxist economist Michael Roberts wrote:
Corporate tax rates were slashed during the neoliberal period. Officially, the United States has a 35 percent marginal tax rate on corporations, but after various exemptions, it is effectively only 23 percent--among the lowest in the world. Yet economic growth has floundered; instead, there has been a rise in the share of profits going to capital at labor's expense and a rise in unproductive financial speculation.
And the neoliberal era, when nominal income tax rates for the richest were cut in half, has produced significantly lower economic growth compared to the previous "high-tax" era of the post-Second World War capitalist boom.
What about infrastructure?
Few would doubt the need for this. The American Society of Civil Engineers (ASCE) grades U.S. infrastructure--roads, bridges, airports, the electrical grid, wastewater treatment facilities, schools and the like--at a D+. ASCE calls for an investment of more than $2 trillion over the next 10 years to even get the U.S. infrastructure to a grade of "adequate."
The plans that Trump and his team have floated are only half as large--and there's no reason to believe they would pass a Republican Congress without reductions.
But worse than that, the Trump plan is less a blueprint for a New Deal-like program to hire millions to build needed public goods, but a Trojan horse to privatize public resources. The Trump plan relies on "public-private" partnerships, where taxpayers will finance up to 82 percent of the investment, but private entities will end up owning and operating the projects.
This means that private greed, not public needs, will drive what infrastructure spending will take place--again, if Trump manages to get something passed in Congress. As economist and New York Times columnist Paul Krugman pointed out:
[M]any cities will have to replace their water systems in the years ahead, one way or another; if that replacement takes place under the Trump scheme rather than through ordinary government investment, we haven't built additional infrastructure, we've just privatized what would have been public assets --and the people acquiring those assets will have paid just 18 cents on the dollar, with taxpayers picking up the rest of the tab.
None of this even takes account of other key elements of Trump's program, particularly his "America First" trade policy and measures to restrict immigration. Protectionism could lead to higher prices for goods in the U.S., and anti-immigrant scapegoating will sow divisions among workers.
As Pranav Jani asked in an SW article: "How is that a victory for workers in the U.S.? Are the jobs resulting from Trump's policies going to be available to all? Will they have decent wages and benefits? Are they going to come with health benefits, with access to reproductive rights?"
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Capital Goods and Bads
Despite the stock market rally and the upturn in business optimism, the key indicators that would tell us the U.S. economy is poised for takeoff have yet to show that.
A Commerce Department report released March 24 showed that new orders on "non-defense capital goods"--a measure that includes major goods like machines that corporations would order when making investments to expand operations--dropped by 0.1 percent in February, after increasing by 0.1 percent in January. Spending on these goods is up in dollar terms over last year, but the rate of spending actually may be decelerating.
In other words, based on the "hard" indicator of business investment in capital goods, it doesn't appear that the U.S. economy is awaiting liftoff.
"After the nice gains seen in the fourth quarter, core capital goods bookings seem to have plateaued for the moment," Stephen Stanley, chief economist at Amherst Pierpont Securities, told the Wall Street Journal. "It feels like we are heading for a classic first-quarter subpar GDP result."
In fact, Treasury Secretary Steve Mnuchin has already been dialing back Trump's predictions of 4 percent GDP growth to around 3 percent.
There's also a question of how much of the capital investment uptick seen in the second half of 2016 mostly reflects investment in oil and natural gas as prices for those commodities rose after an unprecedented collapse that bottomed out earlier in the year. Those prices have recently showed signs of reversing course and dropping again.
The Commerce report on business investment came weeks after the government's survey of consumer spending showed a 0.1 percent monthly increase. So it doesn't appear that the people telling researchers they are more confident in the economy have necessarily decided to spend money.
By themselves, neither of those indicators tell whether the economy will expand or not this year, or by how much. But neither do they justify the expectations that the stock market appears to have been building up during the Trump presidency. By historical measures, stock prices are highly inflated, so more drops in Dow like the ones that came in late March are possible.
After their collapse on Obamacare, Republicans are turning the page to their plans for more massive tax cuts, which will primarily benefit the rich.
But if they couldn't make good on their 7-year-old crusade to repeal Obamacare, there's no guarantee they'll manage on their tax agenda either.
Even if they do, the Trump tax plan will help working people about as much as the other parts of his agenda--which is to say, not at all.