THE TROU­BLE WITH TRUMPONOMICS

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - I AN MCGU­GAN

On the sur­face, the Pres­i­dent’s tax cuts ap­pear to be pro­pel­ling the U.S. econ­omy to great heights. But clouds are form­ing. The gap be­tween rich and poor is widen­ing and govern­ment deficit is bal­loon­ing. Is a slow­down ahead? Ian McGu­gan re­ports from Mor­ris­town, N.J.

Un­em­ploy­ment is at its low­est since 1969 and com­pa­nies are flush with cash. But the strong num­bers mask a weak­ness of Trump’s eco­nomic plan: It’s creat­ing both in­fla­tion­ary pressure and greater in­equal­ity

If you want a snap­shot of the U.S. econ­omy at half­time of Donald Trump’s pres­i­dency – or at least at half­time of the Repub­li­can’s first term – pay a visit to this hand­some com­muter town an hour out­side of Man­hat­tan. Up­scale restau­rants, bridal bou­tiques and photo gal­leries line the com­mu­nity’s pic­tureper­fect main street, like an un­bro­ken wall of af­flu­ence.

Look more care­fully, though, and a few of the de­tails don’t seem quite so ap­peal­ing. At the Church of the Redeemer, a short walk away from “the Green” – Mor­ris­town’s im­mac­u­lately groomed cen­tral park – a com­mu­nity soup kitchen is serv­ing up food to a dozen men who have gath­ered at 10 in the morn­ing. Across the street, a sign in the win­dow of a po­di­a­trist’s of­fice in­vites peo­ple to par­tic­i­pate in a hunger walk to help lo­cal char­i­ties.

A man named Bob Wood­ward – “just like the jour­nal­ist, but with­out the money” – sits by the Green, read­ing a news­pa­per. The 62-year-old of­fice cleaner has lived in Mor­ris­town for 15 years and doesn’t like the grow­ing num­ber of un­em­ployed drifters he sees on its streets.

“There’s a lot of gen­eros­ity around here, but also a lot of peo­ple who want to take ad­van­tage of that gen­eros­ity,” he gripes. Times are still tough for many of the town’s work­ing folks, he says, de­spite an econ­omy that is sup­posed to be thriving.

It’s not just Mr. Wood­ward who has yet to feel the lift of Trumponomics. Like Mor­ris­town, the sparkling façade of the cur­rent U.S. boom hides some grit­tier re­al­i­ties. Eco­nomic growth is siz­zling, but wage gains for most work­ers are run­ning only slightly ahead of in­fla­tion. Stock mar­kets have hit record highs, but home con­struc­tion re­mains in the dumps. Mean­while, Wash­ing­ton’s deficit is spi­ralling higher, and so are in­ter­est rates, to the point where many econ­o­mists ques­tion how long the good times can last.

“Boom will turn to bust in 2019,” ac­cord­ing to Cap­i­tal Economics, the Lon­don-based re­search group. It pre­dicts that the glow from the tax cuts and spend­ing unleashed by the Repub­li­cans late last year will fade over the com­ing months and eco­nomic growth will slow from 2.8 per cent this year to just 1.5 per cent in 2020. The fore­caster sees a sig­nif­i­cant risk of a re­ces­sion by the next pres­i­den­tial elec­tion.

The Fed­eral Re­serve is only marginally more up­beat. The United States’ cen­tral bank­ing sys­tem says growth will dwin­dle to a lack­lus­tre 2 per cent in 2020 from 3.1 per cent this year. Longer term, the Fed sees eco­nomic ex­pan­sion slow­ing even fur­ther, to around 1.8 per cent.

Nei­ther of th­ese down­beat fore­casts has any­thing to do with pol­i­tics or elec­tions. Rather, they re­flect es­ti­mates of how fast the U.S. econ­omy can grow with­out driv­ing in­fla­tion past the lim­its the Fed will tol­er­ate. In the eyes of most an­a­lysts, the mas­sive fiscal stim­u­lus de­liv­ered by the White House is push­ing growth to its nat­u­ral lim­its and prob­a­bly beyond.

Could growth sur­prise and keep on sur­pass­ing ex­pec­ta­tions? It’s pos­si­ble, but to ac­com­plish that, this boom will have to prove it can make all of Amer­ica great again, not just the up­per tiers of so­ci­ety.

To date, the ev­i­dence is mixed. Un­der Barack Obama, the U.S. job­less rate slid from 7.8 per cent in 2009 to 4.8 per cent in 2017. Un­der Mr. Trump’s un­con­ven­tional ad­min­is­tra­tion, un­em­ploy­ment has con­tin­ued to slide even fur­ther and now stands at a mere 3.7 per cent, the low­est level since 1969.

Give Trumponomics its due: This is a com­mend­able achieve­ment. How­ever, the num­bers aren’t quite as spec­tac­u­lar as the White House ad­ver­tises. Un­em­ploy­ment rates show how many peo­ple are not work­ing among all those who are counted as part of the work force. The rate can de­cline sim­ply be­cause peo­ple give up look­ing for work and fall out of statis­ti­cians’ def­i­ni­tion of the work force.

For a broader pic­ture of the jobs mar­ket, econ­o­mists turn to the em­ploy­ment-to-pop­u­la­tion ra­tio, which shows how much of the to­tal pop­u­la­tion has a job. The most im­por­tant em­ploy­ment-topop­u­la­tion ra­tio – the one for prime-age work­ers, be­tween 25 and 54 – has re­bounded nicely in re­cent years but is still be­low the peaks reached be­fore the 2008 fi­nan­cial cri­sis.

Wage gains have been muted, too. The weekly af­ter-in­fla­tion earn­ings of a typ­i­cal worker have ex­panded at a slower pace un­der Mr. Trump than they did dur­ing the lat­ter years of the Obama ad­min­is­tra­tion. Pay­cheques for that me­dian worker are only 7 per cent higher, in real terms, than they were head­ing into the fi­nan­cial cri­sis a decade ago.

To be fair, the mid­dle-class mis­ery in U.S. so­ci­ety stretches back much fur­ther than that. In­comes for the typ­i­cal Amer­i­can fam­ily have barely budged, in af­ter-in­fla­tion terms, since the turn of the cen­tury. Last year, the me­dian house­hold took in US$61,372, only about a thou­sand dol­lars more than it did in 1999.

In con­trast, the rich have pros­pered might­ily. “The top 1 per cent’s share of in­come be­fore trans­fer and taxes has been ris­ing since the late 1970s and in the past decade has climbed to lev­els not seen since the 1920s,” ac­cord­ing to a 2017 re­port from the Cen­ter on Bud­get and Pol­icy Pri­or­i­ties, a non-par­ti­san re­search group in Wash­ing­ton. It es­ti­mates that the top 1 per cent of house­holds now con­trols 39 per cent of the coun­try’s wealth.

What con­cerns many ob­servers is that the Trump ad­min­is­tra­tion’s poli­cies do noth­ing to al­le­vi­ate the dis­par­i­ties. In­stead, the tax cuts passed in late 2017 are flowing dis­pro­por­tion­ately to those who are al­ready well off. “The main ben­e­fi­cia­ries of the tax re­form are thus the same house­holds that have seen the largest real in­come gains over the past 15 years,” ac­cord­ing to an In­ter­na­tional Mon­e­tary Fund work­ing pa­per pub­lished in Au­gust. If any­thing, the ad­min­is­tra­tion’s tax cuts only make an un­equal so­ci­ety even more un­equal.

Just as wor­ri­some, the tax cuts blow a hole in Wash­ing­ton’s bud­get. Even af­ter ac­count­ing for the boost that lower taxes may give the econ­omy, the changes will add US$1.9-tril­lion to the deficit over the next 10 years, ac­cord­ing to the Con­gres­sional Bud­get Of­fice.

Over the long haul, the out­look grows much darker. If the tax cuts are left in place for a gen­er­a­tion, the amount of govern­ment debt held by the pub­lic will soar from around 78 per cent of eco­nomic out­put now to an un­prece­dented 152 per cent in 2048, the CBO es­ti­mates.

The White House ar­gues the tax cuts will pro­duce a surge of new in­vest­ment in fac­to­ries, ma­chines and other types of pro­duc­tive goods, which will lead to much higher eco­nomic growth. Un­for­tu­nately, the ev­i­dence for this happy propo­si­tion is weak. While there was a swing up­ward in the first two quar­ters of this year, busi­ness in­vest­ment has al­ready “mod­er­ated from its rapid pace ear­lier in the year,” ac­cord- ing to the Fed­eral Re­serve’s pol­icy state­ment this week.

Many ob­servers say the tax cuts have sim­ply pro­duced a sugar high in the U.S. econ­omy that is bound to fade. Joel Naroff of Naroff Eco­nomic Ad­vi­sors in Hol­land, Pa., ar­gues that the Trump ad­min­is­tra­tion is court­ing frus­tra­tion by in­sist­ing on pour­ing more stim­u­lus into an econ­omy al­ready op­er­at­ing near full ca­pac­ity. The ad­di­tional dol­lop of stim­u­lus sim­ply adds to in­fla­tion­ary pressure, which the Fed­eral Re­serve then off­sets with higher in­ter­est rates.

The slow­ing ef­fect from higher rates is al­ready un­der way, Mr. Naroff says. “Don’t ex­pect fourthquar­ter growth to be any­where near what we have seen over the past two quar­ters,” he warns. “The econ­omy is not fal­ter­ing. It’s just that we are mov­ing back to­ward more sustainable growth.”

One key to keeping that growth alive lies in the hous­ing mar­ket. It rep­re­sents both the good and the bad of the Trump econ­omy. On the one hand, home prices have climbed steadily, in line with the grow­ing pros­per­ity of the well-todo, and have now sur­passed their bub­ble-era peak. On the other hand, home con­struc­tion has never re­cov­ered from the crash of a decade ago. Re­mark­ably, the U.S. is build­ing fewer homes now than it did 50 years ago, when the pop­u­la­tion was a third smaller.

Why isn’t home build­ing boom­ing in a fully em­ployed econ­omy? Spi­ralling wages for con­struc­tion work­ers present one chal­lenge. Ris­ing mort­gage costs and heftier reg­u­la­tory bur­dens are oth­ers. The big­gest is­sue of all, though, is a sim­ple mis­match be­tween small pay­cheques and ex­pen­sive houses: Many Amer­i­cans sim­ply can’t af­ford to buy homes.

The me­dian price of a home shot up 41 per cent faster than in­fla­tion be­tween 1990 and 2016, ac­cord­ing to the Joint Cen­ter for Hous­ing Stud­ies at Har­vard Univer­sity. Mean­while, in­comes for the bot­tom quar­ter of house­holds and for young adults barely budged in real terms. Wage gains for both groups lagged far be­hind the over­all growth of the econ­omy, which ex­panded 52 per cent over the past 30 years.

“If in­comes had kept pace more broadly with the econ­omy’s growth over the past 30 years, they would have eas­ily matched the rise in hous­ing costs – un­der­scor­ing how in­come in­equal­ity has helped to fuel to­day’s hous­ing af­ford­abil­ity chal­lenges,” the Har­vard re­searchers wrote in a re­port this year.

For the Trump boom to con­tinue, pol­icy-mak­ers will have to get very lucky in­deed. They have to hope that eco­nomic growth results in wide­spread wage growth, es­pe­cially among lower-paid work­ers. That, in turn, will have to trans­late into de­mand that will be strong enough to en­cour­age more busi­ness in­vest­ment and home build­ing and ro­bust enough to over­come the drag of ris­ing in­ter­est rates.

The odds seem against it. “There are al­ready signs that ris­ing bor­row­ing costs are weigh­ing

on rate-sen­si­tive sec­tors of the econ­omy, in par­tic­u­lar the hous­ing mar­ket,” writes Paul Ash­worth of Cap­i­tal Economics. “With the boost from fiscal stim­u­lus set to fade, this is a key rea­son why we ex­pect eco­nomic growth to slow sharply next year.”

That would not sur­prise Mr. Wood­ward, the of­fice cleaner in Mor­ris­town. He says the strong econ­omy has had lit­tle ef­fect on his own earn­ings or em­ploy­ment, al­though the doc­tors whose off- ices he cleans ap­pear to be do­ing very well. The dis­par­ity is part of a pat­tern he knows all too well – one he sees re­flected in Congress’s gen­er­ous tax breaks for the wealthy.

He says the Pres­i­dent clearly has his agenda – an agenda that doesn’t hap­pen to in­clude peo­ple like him. “If you’re well-to-do, and don’t want to lose it, he’s your guy,” he says. “But if you’re an or­di­nary per­son, try­ing to make ends meet, not so much.”

THE GLOBE AND MAIL MICHAEL FALCO/

The Church of the Redeemer has an ac­com­pa­ny­ing soup kitchen along South Street in Mor­ris­town.

Stat­ues of Ge­orge Wash­ing­ton, Alexan­der Hamil­ton and the Mar­quis de Lafayette stand in ‘the Green’ – Mor­ris­town’s im­mac­u­lately groomed cen­tral park – on Fri­day.

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.