“If pol­i­cy­mak­ers raise in­ter­est rates too briskly, the re­sult will be re­ces­sion. If they raise rates too slowly, in­fla­tion could be­come un­com­fort­ably high and in­grained”

Financial Mirror (Cyprus) - - FRONT PAGE -

US Pres­i­dent Don­ald Trump has boasted that his poli­cies will pro­duce sus­tained 3-4% growth for many years to come. His pre­dic­tion flies in the face of the judg­ment of many pro­fes­sional fore­cast­ers, in­clud­ing on Wall Street and at the Fed­eral Re­serve, who ex­pect that the US will be lucky to achieve even 2% growth.

But is there any chance that Trump might be right? And if he is, to what ex­tent will his poli­cies be re­spon­si­ble, and will faster growth en­tail grave long-term costs to the en­vi­ron­ment and in­come in­equal­ity? The stock mar­ket may care only about the growth rate, but most Amer­i­cans should be very con­cerned about how growth is achieved.

Trump’s forecast for the United States’ over­all eco­nomic­growth rate is hardly wild-eyed. A steady stream of eco­nomic data sug­gests that the an­nual rate has now ac­cel­er­ated to 2.5%, roughly split­ting the dif­fer­ence be­tween Trump and the ex­perts. More­over, em­ploy­ment gains have been ro­bust dur­ing the first six months of Trump’s pres­i­dency, with more than a mil­lion jobs cre­ated, and stocks are soar­ing to new highs, both of which are fu­el­ing higher con­sump­tion.

Given this per­for­mance, get­ting to 3% an­nual growth would hardly be a mir­a­cle. And achiev­ing Trump’s tar­get would be even more likely if his ad­min­is­tra­tion sud­denly be­came more co­her­ent (which could in­deed re­quire a mir­a­cle).

Of course, growth this year is in many ways a con­tin­u­a­tion of that achieved dur­ing Barack Obama’s pres­i­dency. Al­ter­ing the course of a gi­ant ship – in this case, the US econ­omy – takes a long time, and even if Trump ever does man­age to get some of his eco­nomic agenda through the US Congress, the growth ef­fects are not likely to be felt un­til well into 2018.

To be sure, Trump has evis­cer­ated the En­vi­ron­men­tal Pro­tec­tion Agency (which has helped coal min­ing), soft­ened fi­nan­cial over­sight (great for bank stocks), and has shown lit­tle in­ter­est in anti-trust en­force­ment (a wel­come de­vel­op­ment for tech mo­nop­o­lies like Ama­zon and Google). But his main pol­icy ini­tia­tives for cor­po­rate tax re­form and in­fra­struc­ture spend­ing re­main on the draw­ing board.

More­over, Trump’s plans to in­crease pro­tec­tion­ism and sharply re­duce im­mi­gra­tion, if re­alised, would both have sig­nif­i­cant ad­verse ef­fects on growth (though, to be fair, the pro­posal to have the com­po­si­tion of im­mi­gra­tion more closely match the econ­omy’s needs is what most coun­tries, in­clud­ing Canada and Aus­tralia, al­ready do).

Per­haps the sin­gle most im­por­tant de­ci­sion Trump will make on the econ­omy will be his choice of who should re­place Janet Yellen as Chair of the Fed­eral Re­serve Board. In other ap­point­ments, Trump has pre­ferred gen­er­als and busi­ness­peo­ple to tech­nocrats. By and large, the most suc­cess­ful bankers in re­cent years have been ex­actly the types of ex­perts Trump seems to avoid.

Who­ever Trump ap­points is likely to face ma­jor chal­lenges im­me­di­ately. Sub­dued wage growth in the face of a tight­en­ing labour mar­ket is un­likely to con­tinue, and any big rise in wages will put strong up­ward pres­sure on prices (though this might not hap­pen any­time soon, given the re­lent­less down­ward pres­sure on wages com­ing from au­to­ma­tion and glob­al­i­sa­tion).

How the Fed han­dles an even­tual tran­si­tion to higher wage growth will be crit­i­cal. If pol­i­cy­mak­ers raise in­ter­est rates too briskly, the re­sult will be re­ces­sion. If they raise rates too slowly, in­fla­tion could be­come un­com­fort­ably high and in­grained.

So, yes, Trump just might get his growth num­ber, es­pe­cially if he finds a way to nor­malise eco­nomic pol­i­cy­mak­ing (which is highly un­cer­tain for a pres­i­dent who seems to pre­fer tweet storms to pa­tient pol­icy anal­y­sis). But even if the US hits the 3% tar­get, it might not be the panacea the Trump ad­min­is­tra­tion hopes it will be.

For starters, faster growth is un­likely to re­verse the cur­rent trend to­ward in­equal­ity, and a few small, tar­geted pres­i­den­tial in­ter­ven­tions into the ac­tions of spe­cific states or com­pa­nies are hardly go­ing to change that. On the con­trary, there is no rea­son to pre­sume that own­ers of cap­i­tal will not con­tinue to be the main ben­e­fi­cia­ries. Even­tu­ally, that trend could re­verse, but I wouldn’t bet on it hap­pen­ing just yet.

If en­vi­ron­men­tal degra­da­tion and ris­ing in­equal­ity make eco­nomic growth such a mixed bless­ing, is the US govern­ment wrong to fo­cus on it so much? Not en­tirely. Higher growth rates are par­tic­u­larly good for smaller busi­nesses and star­tups, which in turn are a ma­jor con­trib­u­tor to eco­nomic mo­bil­ity.

Re­cent low growth rates have made po­ten­tial en­trepreneurs far more re­luc­tant to move across states or to change jobs, and have re­duced eco­nomic mo­bil­ity in gen­eral. And if the US econ­omy were to weaken sub­stan­tially for a pro­longed pe­riod, it could bring for­ward con­sid­er­ably the day when the US no longer has sig­nif­i­cant mil­i­tary su­pe­ri­or­ity over its ri­vals.

Those who, like Trump, want to re­duce US mil­i­tary in­volve­ment over­seas may ar­gue that this is noth­ing to worry about, but they are wrong. Still, poli­cies that pro­duced more broadly shared and en­vi­ron­men­tally sus­tain­able growth would be far bet­ter than poli­cies that per­pet­u­ate cur­rent dis­tri­bu­tional trends and ex­ac­er­bate many Amer­i­cans’ woes. Even if Trump hits his growth tar­gets in 2018 and 2019 – and he just might – only the stock mar­ket may be cheer­ing.

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