So is Trumponomics working? With one significant caveat, the answer is no. For one thing, Trump’s trade policy is turning out to be worse than expected. For another, the growth surge mostly reflects a temporary sugar high from last December’s tax cut. Economists are already penciling in a recession for 2020.
.. At a time of toxic inequality and declining intergenerational mobility, inheritance taxes ought to be increased, but Trump cut them. However, the reduction in the corporate tax rate, coupled with incentives for businesses to invest more, has boosted spending on R&D, information technology and other machinery. Extra investment should make workers more productive. It might even shift U.S. growth to a higher trajectory.
.. you can’t rule out the possibility that the Trump investment incentives are hitting the economy just as a new wave of IT innovations is ripe for deployment.
.. The question is whether the expected productivity boost will outweigh the drag from the tax cut’s other consequence: a huge rise in federal debt.
.. The extra $1 trillion or so of federal debt will have to be serviced: Today’s sugary tax cuts imply tax hikes in the future. Likewise, the corporate investment incentives are temporary: They may simply bring investment forward, depriving tomorrow’s economy of its tech caffeine jolt.
.. many Wall Streeters expect a recession once the sugar high dissipates. The Tax Policy Center estimates that gross domestic product in 2027 will be the same as it would have been without the tax cut.
.. There will be no growth to compensate for extra inequality and debt.
.. And that is without considering the harm from Trump’s trade wars. In Europe, Trump has browbeaten U.S. allies and reserves the right to beat them up further; the only “gain” is a discussion of a new trade deal that was on offer anyway before Trump’s election. In the Americas, Trump has arm-twisted Mexico into accepting a new version of NAFTA that is worse than the old one, and demands that Canada sign on.
.. But the greatest damage stems from Trump’s trade war with China. His opening demand — that China abandon its subsidies for strategic high-tech industries — was never going to be met by a nationalistic dictatorship committed to industrial policy.
.. His bet that tariffs will drive companies to shift production to the United States is equally forlorn. If manufacturers pull out of China, they are more likely to go elsewhere in Asia.
And even if some manufacturing does come to the United States, this gain will be outweighed by the job losses stemming from Trump’s tariffs, which raise costs for industries that use Chinese inputs.
.. In short, Trump isn’t helping the American workers he claims to speak for. Instead, he is battering the rules-based international system that offers the best chance of constraining China.
.. do not be surprised if the populists are temporarily popular: Popularity is what they crave most, after all. But recall that, everywhere and throughout history, the populists’ folly is unmasked in the end.
Days of Fear, Years of Obstruction
What the crisis called for, then, were policies to boost spending, to offset the effects of the housing bust. But the normal response, cutting interest rates, wasn’t available, because rates were already near zero. What we needed, instead, was fiscal stimulus: increased government outlays and tax cuts for lower- and middle-income families, who would be likely to spend them.
And we did indeed get substantial stimulus. But it wasn’t big enough, and even more important, it faded out much too fast. By 2013, with unemployment still above 7 percent, government at all levels was providing barely more economic support than it had in 2007, when the housing boom was still running strong.
.. But the most important reason the great slump went on so long was scorched-earth Republican opposition to anything and everything that might have helped offset the fallout from the housing bust.When I say “scorched earth,” I’m not being hyperbolic. Let’s not forget that in the summer of 2011 Republicans in Congress threatened to provoke a new financial crisis by refusing to raise the debt limit. Their goal was to blackmail President Barack Obama into cutting spending at a time when unemployment was still 9 percent and U.S. real borrowing costs were close to zero.
.. The very same politicians who piously declared that America couldn’t afford to spend money supporting jobs in the face of a deep, prolonged slump just rammed through a huge, deficit-explodingtax cut for corporations and the wealthy even though the economy is currently near full employment. No, they haven’t abandoned their commitment to fiscal responsibility; they never cared about deficits in the first place.
.. So if you want to understand why the great slump that began in 2008 went on so long, blighting so many American lives, the answer is politics. Specifically, policy failed because cynical, bad-faith Republicans were willing to sacrifice millions of jobs rather than let anything good happen to the economy while a Democrat sat in the White House.
How Trump Survives
NBC News and the Wall Street Journal polled his job approval. There was no appreciable change.
.. Why? The most important reason has to be the remarkable state of the American economy. On Election Day 2016, the Dow Jones Industrial Average closed at 18,332.43. On August 29, it closed at 26,124.57. That is an increase of some 40 percent. Other indices show similar gains. Growth in GDP went from 1.5 percent in 2016 to 2.3 percent in 2017 and, helped by the excellent 4.2 percent number in the second quarter, is forecast for around 3 percent in 2018.
.. The fact that presidents are not responsible for the economy does not stop the public from assigning them blame or credit. And Trump deserves some credit. His pro-business attitude stirs the bulls’ animal spirits. His deregulatory and tax policies contribute to growth. Trump understands that he is riding the bull — and that his following will be strong for the duration of the journey.
.. The economic boom is crucial in understanding why Trump enjoys the 88 percent approval among Republicans that keeps him politically viable... Trump continues to goad, highlight, and benefit from an antagonistic news media. The overwhelmingly negative coverage of Trump paradoxically works to his advantage by driving his supporters to rally to his side. When the press gets a story wrong, Trump is vindicated. His voters have less reason to trust the elite media institutions they see as allied against them in a struggle over American identity... Media obsession with Trump and scandal helps the president in other ways. For one, the scandals are confusing and increasingly self-referential. Only political professionals and junkies can keep track of them. The headlines run together. The talking heads are background noise to men and women outside the bubble... The media fixation hands Trump the initiative. Because so much of the news is based on his Twitter feed, he can create storylines — and spark confusion and outrage — with the push of a button. This ability lets him shift attention from current controversies by creating fresh ones. The ongoing hysteria lessens the cost to Trump of each bad story. It also allows him to portray media institutions and figures as insiders contemptuous of Trump voters and eager to overturn the result of a presidential election.Democrats — and most Republicans for that matter — have yet to grasp the ideas of political economy that Trump intuits: government that privileges American citizens through
- tight labor markets,
- border security,
- trade reciprocity, and
- entitlements.
.. Nor do Democrats understand that American populism is not simply economic. It is cultural. It has long been associated with traditional values and practices, an unreconstructed patriotism, and support for law and order. No matter how well Democratic proposals might test, the party will not succeed at the national level unless it addresses and mollifies the social concerns of the white working class. Pelosi, Schumer, and Sanders have not tried.
Putin’s Unlikely Ally in His Standoff With the West: His Central Banker
Elvira Nabiullina has earned an unusual degree of freedom to buttress an economy buffeted by sanctions
After Russia’s central-bank chief, Elvira Nabiullina, moved to shut down a large lender last year for allegedly falsifying accounts, the nation’s top prosecutor’s office issued an order to leave the bank alone.
She closed it anyway.
In her five years in office, Ms. Nabiullina has closed hundreds of weak banks, stymied the exodus of Russian wealth abroad and transformed monetary policy to bring inflation to record lows. That has earned her an unusual amount of freedom to make tough decisions, even if that means treading on powerful interests.
.. As President Vladimir Putin bids to return Russia to great-power status, challenging the U.S. and Europe from Syria to Ukraine, it’s her job to shore up the economy against volatile oil markets and sanctions. Russia’s ability to continue its quest rests in large part on whether Ms. Nabiullina can keep the financial system stable.
Ms. Nabiullina has earned public praise from
- Mr. Putin, who rarely commends subordinates, as well as from abroad. Last year at the Kremlin, Mr. Putin told her that “under your leadership, the central bank has done a great deal to stabilize the economic situation.” Managers at big investment funds, from
- Pacific Investment Management Co. to Pictet Asset Management, call Ms. Nabiullina one of the world’s most skilled central bankers.
- Christine Lagarde, managing director of the International Monetary Fund, lauded her in May for setting “standards of quality for macroeconomic policy.”
.. In 2006, the central-bank official responsible for revamping the system, Andrey Kozlov, was shot dead in his car. Russian financier Alexey Frankel, whose banking license Mr. Kozlov had revoked earlier that year, was later convicted of organizing the killing.
.. She has earned a reputation for bookishness, personal honesty and fixation on detail
.. Industry veterans said that before Ms. Nabiullina took over, banking licenses were mostly used as mechanisms to funnel money abroad and process insider deals.
.. When she took over the institution, banks and companies were moving $5 billion out of the country every month, and inflation topped 7%.She shut down 70 banks in her first year... Ms. Nabiullina stopped a longstanding policy of spending billions of dollars from the country’s reserves to try to prop up the ruble. In December 2014, with the ruble continuing to fall, the central bank nearly doubled its key lending rate to 17% at an emergency late-night meeting.
.. The rate increase restored calm to markets but strangled the country’s consumer-fueled growth. The country’s emerging middle class, which had become used to foreign vacations and European cars, is still feeling the effects of the ruble’s collapse... Since she took office, she has halved the number of Russian banks, shutting down about 440 lenders. She has reduced capital outflows by about 50% to $2.5 billion a month... Many of the banks she closed had been considered untouchable, analysts said. Some, such as Promsviazbank, counted lawmakers and state-company executives among its shareholders and held money for national oil companies and the Orthodox Church... Others, like Bank Sovetskiy, had served political objectives, providing banking services in Crimea, the Ukrainian region the Kremlin annexed in 2014... When the central bank took over Yugra last June following repeated warnings, it said it found a $600 million deficit in its balance sheet masked with bad loans. Just hours before the bankrupt bank’s license was due to expire, the prosecutor’s office ordered a halt to the closure, calling the bank “a financially stable credit organization.” Ms. Nabiullina rejected the order.
.. “It was a test of will, and she won,” said banking analyst Mr. Lukashuk... In January, inflation hit a record low for the post-Soviet period of 2.2%, a result of Ms. Nabiullina’s decision to keep interest rates high after the Crimea sanctions. Some tycoons have urged a faster reduction... Still, she has struggled to regulate Russia’s lesser, underperforming state-owned banks, whose executives often treat them as fiefs, analysts said. These banks are kept afloat by constant injections of state funds, which the executives have funneled into unrelated assets ranging from supermarkets to railroad cars... Almost a trillion rubles of public capital, about $16 billion at today’s rate, went to just three state-owned banks—
- VTB,
- Gazprombank and
- Rosselkhozbank—
in the first four years of Ms. Nabiullina’s central-bank term, according to Fitch Ratings. All are still saddled with bad debts or illiquid assets.
.. Her modest economic forecasts have consistently lagged behind Mr. Putin’s goals, which she said can only be achieved through deep, unpopular changes to the system.
Even if the price of oil rose to $100, from around $65 today, she said, “it’s very unlikely that our economy can grow above 1.5% to 2%” a year.