Economy

Can the economy survive Trump? Sure — for a while.

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Expansions have momentum: We’re well into an economic expansion that just began its ninth year, and as I’ve stressed in recent writings, at time like this presidents have less to do with economic outcomes than we tend to give them credit for — and certainly less than they take credit for. Consumer spending, which makes up 70 percent of gross domestic product, is being fueled by steady job growth, and while wages should be growing more quickly given the tautness of the job market, they’re still beating inflation. The red line in the figure below shows the annual growth in economy-wide real weekly earnings — the billions of dollars you get by multiplying the number of jobs times real average weekly earnings. As you see, it tracks real consumer spending (the blue line) pretty closely.


Sources: BEA, BLS

The virtuous cycle is simple: Solid job gains boost consumer spending, which drive more labor demand. Inflation is in check (low energy prices help here, too), so real paychecks have been growing, at least on average. To be clear, Trump has nothing to do with any of this; it was all purely inherited. But the point is: The chaos he’s generating is not derailing it.

Of course, even at this late date, significant pockets of the country haven’t benefited from this expansion. These are average results, and higher inequality means averages are less representative of many people’s experiences, including many of the folks who helped put Trump where he is today. In fact, Trump’s health care, budget and tax agenda would worsen their problems.

What about consumer confidence? Won’t Trump’s mess infect people’s confidence about the country, and won’t this ultimately hurt the economy? While consumer confidence and presidential approval are usual correlated, right now the former is way up while the latter’s way down. Alec Phillips from Goldman Sachs recently found that, based on historical correlations presidential approval and economic conditions, Trump’s rating should be 53 percent instead of 38 percent. That’s a near record-wide gap.

My intuition is that people instinctively get that this presidency is uniquely disconnected from the economy. On one side, there’s the car-wreck Trump show taking place daily in Washington and the media; on the other, there’s the real economy.

What about the Trump bump in the stock market? The stock market has climbed significantly since Trump’s election, and given its clear acceleration upon his surprise victory, that Trump bump seems real. But there are two parts to the bump. One is current and expected corporate earnings, which have, with notable exceptions (e.g., retailers without strong e-commerce footprints), been strong. That said, expectations are fragile, and last week revealed that equity markets are vulnerable to Trump-related chaos, along with global terrorist events.

The other component of the Trump bump — expectations that he’s going to legislate infrastructure and tax cuts — has faded. Phillips shows that equity baskets with prices that move with infrastructure and tax cuts have more than given up post-election gains.

Okay, but other than equity markets (which don’t deliver much to the middle class), are you saying there won’t be any economic price to pay for Washington’s dysfunction? No. There are real economic costs (and again, I’m not for a second discounting the noneconomic costs), and some of the most serious are forward-looking.

On one hand, dysfunction can be a feature, not a bug. When the majority in Congress wants to team up with the administration to take away health-care coverage from low- and moderate-income people to help pay for tax cuts for wealthy people, their failure is our success.

That’s not just me talking. When it comes to health care and corporate tax cuts, a lot of people don’t want to dine on what the administration and Congress are cooking up.

But dysfunction can bite hard when there are must-pass deadlines. To avoid defaulting on spending to which they’ve already committed, Congress must raise the debt ceiling by late September. That’s also the deadline for them to pass another budget patch to keep the government from shutting down. Though Trump himself shows little interest and has no credibility in these matters, there are grown-ups in his administration who recognize their importance.

What worries me the most is what happens when presidential leadership actually does matter on the economy: e.g., when the next recession hits. President Obama managed to pass a sizable stimulus less than a month after taking office. Though the old D.C. adage is that the definition of a Keynesian is a Republican in a recession, it’s awfully hard to imagine that a suitably quick, ample, countercyclical fiscal response will be forthcoming.

Also, Trump’s plans to disinvest in human and physical capital (look at his budget, not his alleged infrastructure plan), if enacted, would threaten longer-term productivity growth.

In other words, if any of this sounds surprisingly nonalarmist, don’t worry. There’s lots to be worried about.

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Loknath Das

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