Mnuchin badly deluded on growth

Three per cent may no longer be sustainable

There has been plenty of attention paid to the downside of the Donald Trump administration’s remarkable first month in office. We’ve seen an immigration ban bungled, downright- odd pugnacity with allies like Australia, brinkmanship with China and Mexico, the revelation of more troubling links with Russia, and so on.

Yet stock markets, f or their part, seem to have been doing a pretty good job of focusing almost exclusively on the upside in the administration’s economic promises, which have driven markets up in the States and globally (including Canada, but excluding, notably, Mexico).

Underpinning that ebullient response is a belief the United States is poised to get growing again. In an interview with the Wall Street Journal last week, Steve Mnuchin, the new Treasury Secretary, reiterated his claim that “more normalized economic growth” of three per cent — or even more — was both achievable and sustainable. His boss has declared that four per cent was even within reach.

But is it? And if so, is it sustainable?

The answers to t hose question matter beyond America’s borders. If the world’s biggest economy does i ndeed l aunch i nto hyper- growth, t hen t he global economy stands to benefit, too — and Canada more than others, given our close relationship with the States. ( Let’s assume for now that it doesn’t fall victim to rising U. S. protectionism.)

But make no mistake about how ambitious the Republican target really is. Growth in U. S. real GDP hasn’t been above three per cent for more than a decade — 2005, to be exact, at the height of the housing bubble, when it hit 3.3 per cent. ( Canada’s came in at 3.2 per cent that year.)

That level of growth did not prove sustainable, as we all know. ( See: the housing bust.)

In fact, since the 2008-2009 recession, the highest GDP growth the U. S. managed was in 2015, at 2.6 per cent. So i t makes you wonder what the reference point is for “normal” growth. The U. S. Federal Reserve’s estimate for long- term GDP growth is 1.9 per cent. And you have to go back all the way to the late ’ 90s ( 1996 to 2000, to be exact) to find a five- year period of threeper-cent- plus growth. And that, too, proved unsustainable. ( See: t he dot- com crash.)

Still, if you believe the administration and its boosters, they have discovered the secret sauce that will make high growth stick: the trifecta of Trumpian economics — tax cuts, deregulation and infrastructure spending.

Tax cuts, in particular, could give growth a boost. The World Bank last month estimated that a 15 percent U.S. corporate tax rate ( down f rom 35 per cent now) and other personal tax cuts could raise GDP by 0.3 and 0.7 percentage points this year and next, respectively. That would also have knock- on effects for the global economy, raising GDP worldwide by 0.1 and 0.3 percentage points in 2017 and 2018, respectively, according to the World Bank.

Ye t even that boost wouldn’t get U.S. GDP growth quite to three per cent, by the World Bank’s estimates, which put the theoretical post-tax-cut growth at 2.4 per cent this year and 2.8 per cent in 2018.

As it stands, the tax cut itself is theoretical — Mnuchin has suggested it will get done by August, though even he admits that’s ambitious. As well, t he administration now seems to be leaning toward a border adjustment corporate taxation scheme, which would give a break to exporters and slam importers, at a 20-per-cent tax rate. That’s not 15 per cent, which was a Trump campaign pledge. As well, the border adjustment tax is likely to be inflationary, which at least in the short term could hinder real GDP growth.

So maybe deregulation, particularly of financial i nstitutions, can get growth higher? Well, that’s debatable. It’s not at all clear that post- recession banking regulations, like Dodd- Frank, have been responsible for reduced bank lending, especially given the ultra- low interest rate environment. It’s also not clear that i ncreased l oan supply has any positive impact on economic output — although loan demand might well increase when output goes up. One thing easier lending does tend to do is fuel asset bubbles.

Here’s another way to look at it: If you want to increase economic output, you either get better at making stuff, allowing you to make more ( productivity), or you get more people making more stuff (population growth).

For the U. S., there is no clarity on either front. Productivity growth since 2007 has averaged 1.1 per cent — the lowest mark in the postwar era. Meanwhile, the U. S. population — which isn’ t getting any younger — has been growing by less t han one per cent since 2001, and a good chunk of that growth has been fuelled by immigration. If, as many expect, immigration declines under Trump, fewer adults will be available to fill the jobs needed to grow the economy — and there are already worker shortages in the construction, agriculture, manufacturing and healthcare sectors, among others.

There’s the rub: even if the U. S. government manages to engineer a growth spurt, you have to wonder about sustainability. And that’s not only because highgrowth periods in the 21st century seem not to l ast very long.