They do not call it the dismal science for nothing.
Remember Paul Krugman predicting the apocalypse in the wake of Donald Trump’s election. And now with the economy clipping along at nearly 3 percent, deregulation and lower taxes reviving manufacturing, and consumers confidently spending again, some two-thirds of private sector prognosticators see a recession beginning as early 2020.
The new doomsday scenario offered by the Congressional Budget Office and others is that the economy is getting only a temporary jolt from tax cuts and increased government spending, and aggregate demand will tail off.
Much of this has to do with political bias in a profession where it has become fashionable to call the president a demagogue or simply ignorant and irresponsible, and to view with hypocritical disdain any goal for policy he sets.
It is one thing to dislike him but it’s another thing to ignore years of professional research that predate his ascent. For example, forecast of a coming recession denies that lowering corporate taxes provides more than a temporary jolt to cash flow – it also lowers the cost of capital in the United States as compared to other economies.
Nonpartisan research predating the Trump candidacy indicates the 15 percent cut in taxes on business profits enabled by corporate reforms should increase investment between 7.5 percent and 15 percent. And in the current environment of deregulation, the higher figure should more closely apply.
Look for all that to boost growth in 2019 if something else bad does not happen.
In the near term, little danger is apparent from overheating. Unemployment may be down to 3.8 percent but wages are not taking off. Simply, a good number of healthy recruits remain available among those who became discouraged during the Obama years, a stronger dollar is keeping competitive imports inexpensive, and robotics and artificial intelligence are kicking in.
Headline inflation is piercing the Fed’s 2 percent threshold but that is largely because oil prices CLU8, -1.16 percent were depressed from 2015 to 2017. Bouncing gas prices have lifted headline consumer prices but the trend in the core – prices less food and energy – has been decidedly downward since January.
Consumers generally take a breather during the winter months, because the financial crisis taught them caution. Households have a good time shopping for the holidays and then pay down their bills in the first quarter–hence the tax cut only recently boosted consumer spending.
Fed Chairman Jerome Powell, unlike most professional economists, does not let what personal feelings he has toward politicians cloud his thinking. If the numbers continue to show core inflation subdued, he will recognize the Fed can do little but wreak havoc by boosting interest rates too quickly or too much.
An intemperate surge in rates could be devastating internationally. The Europeans, whose statism most professional economists worship, has failed to clean up its banks. The Brits are the exception but on the continent Germany’s largest bank, Deutsche Bank DB, -2.26 percent, is still run badly, and in Italy, medieval practices die hard.
The dollar BUXX, +0.21 percent has become even more dominant globally, compelling businesses and governments to borrow greenbacks instead of in local currency. Overly aggressive Fed tightening could create crises for many of those debtors–look at Argentina’s recent begging at the door of the International Monetary Fund.
As for a trade war, economists cannot get over the fact that free trade did not work out for the vast swath of interior America, because the Chinese hardly play by free-trade rules.
A poorly conceived American response to China’s aggressive mercantilism could be devastating but doing nothing would be even worse. Look at the corrosive consequences of trade-driven unemployment, social decay and opioid addiction in America’s rural communities and small cities.
The trick is to penalize China in ways that make retaliation difficult–and that can be done. If I have reservations about Trump, it is that his trade team listens to few outsiders because they are too busy arguing among themselves.
Administrations that do not listen are nothing new. Barack Obama was in constant broadcast mode, and his economists could never be accused of having open minds.
There is a resiliency about America when the government gets out of the way. Bank on that.
History has been very unkind to those that short sell the United States of America – credentialed experts included.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. © 2018, The Washington Times, LLC.