THE TROUBLE WITH TRUMPONOMICS
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 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.