Perspective:
The chaos that surrounds the Trump presidency continues to dominate the headlines. Yet a growing GDP shows the economy is expanding. A former chief economist to Vice President Joe Biden tries to make sense of it all.
Let us pause amid the chaos and gather at least our economic wits about us. We’ve got: An escalating trade war. A president spouting rhetoric in the summit from Helsinki that one former CIA director called “nothing short of treasonous.”
A dysfunctional Republican congressional majority that will do nothing to stop any of the above.
And a gross domestic product growth rate of 4.5 percent estimated for the most recent quarter.
How can this be? Can the U.S. economy really be that walled off from our politics? Here’s what I think is going on.
The trade war just isn’t that big a macroeconomic deal yet. In the most recent quarter, our goods imports were $2.5 trillion. Trump’s tariffs have been levied on less than $100 billion of those incoming goods, less than 5 percent of the total. According to model-based estimates by Goldman Sachs researchers, each extra point on the effective tariff rate lowers GDP growth by a few-hundredths of a percent. Targeted sectors have, of course, been hurt more than others, as in soybean exporters facing China’s counter-tariffs. But even if it escalates, as I believe it will, the trade war may not be that big a negative for the macroeconomy. And deep global supply chains continue to support growth.
Speaking of global linkages, most other economies are growing at or above their potential, invoking positive feedback effects for the United States that the trade war has yet to snuff out.
What explains the GDP acceleration?
One answer to that question is fiscal stimulus. The growth impulse from the deficit-financed tax cut and other spending is adding around 0.7 of a percentage point to 2018 GDP growth.
A durable virtuous cycle is afoot, wherein strong job growth, even at weak wage growth, fuels greater consumer demand, which feeds back into stronger job growth, etc. There is a strong correlation between yearly changes in real aggregate earnings of the working class (the 80 percent of the workforce in blue-collar or nonmanagerial jobs) and real consumer spending. In our 70 percent consumption economy, that’s the most important source of momentum right now.
The Federal Reserve is still a strong and, most important, politically independent institution, dedicated to its mission of full employment at stable prices.
Our credit and financial markets are deep, liquid and highly profitable.
Turning back to the big picture, perhaps the most important insight from this dichotomy of political chaos amid strong growth is to recognize the limits of GDP. Though it does a good job of measuring a narrow concept, we elevate it to a much greater level of significance than it deserves.
GDP, for example, not only fails to reflect environmental degradation but also scores such actions as growth-positive.
GDP says nothing about the distribution of growth. Consider weak real-wage-growth. We just learned that the real annual earnings of full-time, middle-wage workers fell by half a percent in the second quarter, and this was their third quarter in a row of losing ground. Meanwhile, as noted above, profits are crushing it.
And, of course, GDP says nothing about the loss of representative democracy.
There are those who believe that if GDP, profits and the stock market are all up, then there’s nothing to worry about. But they are a minority. There are more of us, I’d wager, for whom economic growth is but one input into our well-being, alongside a fair distribution of that growth, a sustainable environment, a representative voice in politics and in the workplace, racial and gender justice, economic mobility such that people can achieve their potential whatever their race or ZIP code, and much more.
Don’t get me wrong. I don’t take GDP growth for granted and worry about the next recession. But even a string of strong quarters, if that’s what we’re looking at, is not anywhere near enough to assuage our prevailing discontent.