The 2% Economy

Yes, that’s what Ellen Zentner, Chief US Economist for Morgan Stanley, says. Maybe 3% for 2nd quarter, only because of a rebound from 1.2% in the 1st quarter. But, on average, look for a very sluggish 2% growth rate for 2017 and for the entire Trump period of office. Or worse.

It could be worse. There could be a major negative shock, such as the sudden failure of our subprime mortgage derivatives in 2007, arguably due to Federal Reserve interest rate management in years prior. Many see this in retrospect as a failed government ploy to stimulate additional spending based on inflated home values. This is an example of how poor government and failed regulation can turn even 2% into a crisis. This kind of shock is very damaging, especially to the working class. During  the “Great Recession,” we were losing more than 500,000 jobs per month, and GDP growth was negative.

It’s much harder to imagine an event or a development which would result in a positive lift in growth rate. TheTrump administration projects 4%, but that’s impossible with a mature economy such as ours at this time, barring politically impossible major stimulants–such as a dramatic increase in immigration (millions more than the 1 million we currently take). Or something far worse and perhaps a bit more likely–the Trump administration stumbling into a major new war. A war might raise the GDP growth rate as we stock up weapons, but the overall consequences would be horrendous.

The Trump administration pins its 4% hopes mostly on tax cuts. It’s rather hard to believe they have succeeded to sell the belief that lowering taxes across the board, corporate and individual, will somehow stimulate the economy in a significant way. That won’t happen. The major impact of tax cuts will be further cuts in programs which benefit the working class, starting with health care, extending to education and other support programs.

The so called “Laffer curve” theory of tax cuts stimulating growth has long been discredited. This would only happen only in a situation where  there is demand to buy, but a constraint on supply of investment and where tax cuts are funneled into creating new businesses which need employees to satisfy the demand. Lately, tax cuts have not resulted in the wealthy investing in jobs creating businesses. And, why should they, when so many citizens have so little money to spend?

The major implication of a 2% economy is that there will not be enough economic growth to enable improved incomes and opportunity for the working class. Our major corporations may still find modest growth in profits and value by reducing expenses, by taking greater advantage of advancing technology, and from the lower tax rates Trump intends. That will benefit those who own stock, but not the working class.

The fact is that economic growth is necessary, but not sufficient to enable any reduction in inequality, any improved access to better jobs, or any reversal in the decline in upward mobility. These require not only strong economic growth, but also political will to enact legislation that favors the working class. We’ve been enacting the opposite type of legislation for more than 30 years now.

At this time, we should be laying the foundation of the next era of solid growth for the US. That growth can only be in the exciting knowledge economy, and not in trying to turn back the clock to restore the manufacturing economy, when so many others nations can do that so much better and cheaper now. We should set about preparing to lead the knowledge economy of the world, with the companion goal of making the future US a society of shared prosperity.

Donald Trump was elected on an agenda of restoring American jobs. He promised to do that largely by threatening foreign countries and large US corporations with jobs in manufacturing going abroad. That plus much stronger economic growth–4%.

Nothing this administration has promised or has done engenders confidence of respected economists to project anything more than a 2% economy.

One has to wonder how long it will take supporters to realize the promises are not going to be kept.

 

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