The Trump Boom Is No Mere ‘Sugar High’

The latest liberal spin is that the economy is on a “sugar high” from deficit-financed tax cuts and spending hikes. When the rush wears off, they warn, watch out for a crash landing. It’s true that in fiscal 2018 the budget deficit swelled to nearly $800 billion, or about 4.2% of gross domestic product. But the Bureau of Economic Analysis estimates that the economic “contribution” from extra government spending added only 0.23 percentage point to growth in 2018. So even without all the budget bloat, the economy would still be growing well above 3%.

.. The same BEA data confirm that this year’s growth comes predominantly from a boom in production and investing—particularly in construction, manufacturing, and oil and gas development. While the housing market is weak, consumers are spending more as their wages rise.
.. The real contradiction in the “sugar high” argument is that it ignores the slow growth of the Obama years, which featured an avalanche of debt spending. Deficits as a share of GDP were 9.8% in 2009, 8.6% in 2010, 8.3% in 2011 and 6.7% in 2012. Where was the sugar high then? Instead of the expected burst in output coming out of the 2008-09 recession, borrowing more than $1 trillion a year for four years yielded the worst recovery since the Great Depression. Even excluding 2009, Mr. Obama’s deficits averaged more than 5% of GDP throughout the rest of his presidency but produced less growth than Mr. Trump has with lower deficits.

This wasn’t what Keynesians expected. Mr. Obama’s economic team predicted 4% growth every year coming out of the recession. Instead the “sugar high” from record peacetime deficits produced measly 2% growth. By 2016 GDP was running about $2 trillion below the trend line of a normal recovery.

The fastest growth rate over the past three decades was recorded in Bill Clinton’s second term, when federal government spending fell from 21.5% to 18% of GDP and deficits disappeared into surpluses. So much for the idea that deficit spending is a stimulant.

Mr. Trump’s fiscal policies have produced more growth than Mr. Obama’s because they were designed to incentivize businesses to invest, hire and produce more here at home. The Obama “stimulus,” by contrast, went for food stamps, unemployment benefits, ObamaCare subsidies, “cash for clunkers” and failed green energy handouts.

.. Massive government spending blitzes don’t produce “sugar highs” or anything like them. Even some conservatives erroneously argue that military spending stimulates the economy. But as Milton Friedman said, the government can only put money into the economy that it first takes out.

.. Those pushing the “sugar high” fallacy also don’t realize that the Trump tax cuts aren’t going away soon. The 2017 business tax cuts can’t cause a recession in 2019 or 2020 because they don’t expire until 2025. They aren’t sugar pills.

The biggest threats to the economic boom and financial markets today are a deflationary Federal Reserve and the specter of a global trade war. Solve those problems and the American economy can keep flying high on its own power. And Mr. Trump’s critics will be proved wrong again.

Trump’s Diminishing Power and Rising Rage

None of Trump’s extremist policy ideas has received public support. The public opposed last year’s

  1. Republican-backed corporate tax cut, Trump’s
  2. effort to repeal the Affordable Care Act (Obamacare), his
  3. proposed border wall with Mexico, the decision to
  4. withdraw from the Iran nuclear agreement, and the
  5. imposition of tariff increases on China, Europe, and others.
  6. At the same time, contrary to Trump’s relentless promotion of fossil fuels (coal, oil, and gas), the public favors investments in renewable energy and remaining in the Paris climate agreement.

.. Trump has tried to implement his radical agenda using three approaches.

1) The first has been to rely on the Republican majorities in the two houses of Congress to pass legislation in the face of strong popular opposition. That approach succeeded once, with the 2017 corporate tax cut, because big Republican donors insisted on the measure, but it failed with Trump’s attempt to repeal Obamacare, as three Republican senators balked.

.. 2)  The second approach has been to use executive orders to circumvent Congress. Here the courts have repeatedly intervened, most recently within days of the election, when a federal district court halted work on the Keystone XL Pipeline, a project strongly opposed by environmentalists, on the grounds that the Trump administration had failed to present a “reasoned explanation” for its actions. Trump repeatedly and dangerously oversteps his authority, and the courts keep pushing back.

.. 3) Trump’s third tactic has been to rally public opinion to his side. Yet, despite his frequent rallies, or perhaps because of them and their incendiary vulgarity, Trump’s disapproval rating has exceeded his approval rating since the earliest days of his administration. His current overall disapproval rating is 54%, versus 40% approval, with strong approval from around 25% of the public. There has been no sustained move in Trump’s direction.

.. In the midterm elections, which Trump himself described as a referendum on his presidency, the Democratic candidates for both the House and Senate vastly outpolled their Republican opponents. In the House races, Democrats received 53,314,159 votes nationally, compared with 48,439,810 for Republicans. In the Senate races, Democrats outpolled Republicans by 47,537,699 votes to 34,280,990.

.. Summing up votes by party for the three recent election cycles (2014, 2016, and 2018), Democratic Senate candidates outpolled Republican candidates by roughly 120 million to 100 million. Nonetheless, the Republicans hold a slight majority in the Senate, where each state is represented by two senators, regardless of the size of its population, because they tend to win their seats in less populous states, whereas Democrats prevail in the major coastal and Midwestern states.

Wyoming, for example, elects two Republican senators to represent its nearly 580,000 residents, while California’s more than 39 million residents elect two Democratic senators. 

Without control of the House, however, Trump will no longer be able to enact any unpopular legislation. Only policies with bipartisan support will have a chance of passing both chambers.

.. On the economic front, Trump’s trade policies will become even less popular in the months ahead as the American economy cools from the “sugar high” of the corporate tax cut, as growing uncertainty about global trade policy hamstrings business investment, and as both the budget deficit and interest rates rise. Trump’s phony national-security justifications for raising tariffs will also be challenged politically and perhaps in the courts.

.. True, Trump will be able to continue appointing conservative federal judges and most likely win their confirmation in the Republican-majority Senate. And on issues of war and peace, Trump will operate with terrifyingly little oversight by Congress or the public, an affliction of the US political system since World War II. Trump, like his recent predecessors, will most likely keep America mired in wars in the Middle East and Africa, despite the lack of significant public understanding or support.

.. Nonetheless, there are three further reasons to believe that Trump’s hold on power will weaken significantly in the coming months. First, Special Counsel Robert Mueller may very well document serious malfeasance by Trump, his family members, and/or his close advisers. 

.. Second, the House Democrats will begin to investigate Trump’s taxes and personal business dealings, including through congressional subpoenas. There are strong reasons to believe that Trump has committed serious tax evasion (as the New York Times recently outlined) and has illegally enriched his family as president (a lawsuit that the courts have allowed to proceed alleges violations of the emoluments clause of the Constitution). Trump is likely to ignore or fight the subpoenas, setting the stage for a major political crisis.

.. Third, and most important, Trump is not merely an extremist politician. He suffers from what author Ian Hughes has recently called “a disordered mind,” filled with

  • hate,
  • paranoia, and
  • narcissism.

According to two close observers of Trump, the president’s grip on reality “will likely continue to diminish” in the face of growing political obstacles, investigations into his taxes and business dealings, Mueller’s findings, and an energized political opposition. We may already be seeing that in Trump’s erratic and aggressive behavior since the election.

.. The coming months may be especially dangerous for America and the world. As Trump’s political position weakens and the obstacles facing him grow, his mental instability will pose an ever-greater danger. He could explode in rage, fire Mueller, and perhaps try to launch a war or claim emergency powers in order to restore his authority. We have not yet seen Trump in full fury, but may do so soon, as his room for maneuver continues to narrow. In that case, much will depend on the performance of America’s constitutional order. 

Is Trumponomics working? Not really.

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.

Crushing it for whom, Mr. Kudlow?

Last week, one of President Trump’s top economic advisers, Larry Kudlow, argued the U.S. economy is “crushing it,” posting boom-like numbers in key areas, all thanks to the leadership of the president.

Evaluating such claims usually begins with assessing whether the president should get credit for an economy he inherited in year eight of a solid expansion. But the fact that Trump is claiming credit for trends that were largely ongoing before he took office is one of the few ways in which he is not much different from former presidents.

.. Who is actually getting ahead in the Trump economy?

.. . In contrast, corporate profits and equity markets truly are crushing it, both on a pre- and especially, given the large business tax cuts, a post-tax basis.

.. There is also no evidence of an investment boom, suggesting the recent, above-trend growth in GDP is Keynes, not Laffer — meaning the deficit spending is providing a temporary boost but will not have lasting, positive impacts for long-term economic growth.

.. Starting with wages, since Trump took office, the real hourly wage for the 82 percent of the workforce that is blue collar in factories and non-managers in services is up half-a-percent, an extra 11 cents per hour.

.. the growth of mid-level pay has picked up a bit, as we’d expect with such low unemployment. But inflation, largely driven by higher energy costs, has also sped up, canceling out any real gains.

.. If energy prices come down and unemployment continues to fall, real wage growth for mid-wage workers will improve. But the magnitude of their gains will likely be nothing close to the administration’s claim that the tax cut would add at least $4,000 to annual earnings within a few years of the legislation.

.. In President Barack Obama’s second term, real annual wage growth for mid-wage workers was about 1 percent, so call that the baseline.

.. Sticking with the tax cut, its proponents main claim was the big corporate cuts would generate more business investment, which would lead to faster productivity growth, which would position us for higher paying jobs. So far, every link in that chain is broken.

.. Business investment is growing, as we’d expect in an economy operating close to full capacity. But its growth rate is not faster now than at various points earlier in the expansion.

.. There has been a modest uptick in investment in structures (such as plants, offices, wells, mine shafts, warehouses) in the first half of 2018, but, as economist Dean Baker has shown, the growth in such investment was due to higher energy prices generating increased investment in mining for oil and natural gas.

.. While mining investment has increased by 36.7 percent over the last year, it rose by 47.3 percent from the second quarter of 2009 to the second quarter of 2010, when the Obama administration was still enforcing environmental laws. In both cases, the key factor was rising world oil prices.

.. It takes time to plan investments, so it is too soon to conclude the tax cuts have not made a difference. But none of the surveys of companies’ investment plans show any plans to ratchet up capital spending

.. What is clear is firms are using their tax windfalls to boost share prices through buybacks, which, along with strong corporate profits, are fueling a historical bull market for stocks.

.. instead of borrowing $2 trillion to finance the regressive tax cut, Congress could have put more money in the pockets of working Americans and made investments for our economic future.

.. First, we should have expanded the Earned Income Tax Credit to compensate for decades of stagnant wage growth. The Brown-Khanna plan, calling for a $1.4 trillion EITC expansion, would have provided working families making up to $75,000 with up to $8,000 more in take home pay.

.. the best way to raise pay for ordinary Americans is to do so directly as opposed to pretending it will come through the largesse of executives and shareholders.

.. Second, we should have put billions to expand the National Science Foundation’s Advanced Technological Education program, linking employers to technical schools to develop credentials that respond to the needs of our cutting-edge industries.

.. Third, we should have provided hiring incentives for anchor companies to create jobs in places left behind such as Paintsville, Ky., or Flint, Mich. If a company is willing to hire in places where people do not have enough access to high-wage jobs, then they should get support for doing so.

.. Fourth, we should have invested in bringing high speed Internet to every corner of America. Providing fiber broadband to every corner of the United States is the modern equivalent of rural electrification.

.. Larry Kudlow’s right: The Trump administration is crushing it for its donor base, which is in turn handsomely rewarding them.

.. But it has done nothing for the forgotten Americans and nothing to make sure America is a winner in the 21st century. We do not need more sugar highs for those already doing well. We need to give lasting pay raises to those struggling to pay the bills and then focus on the forward-looking investments that will finally reconnect GDP growth to broadly shared prosperity.