The Limits of Prosperity?

Lots of good news last week. “The economy is as good as it’s ever been, ever. . . . People can’t believe what’s happening,” says President Trump, abandoning his usual preference for understatement. Economic growth “may be 4 percent for a quarter or two” Larry Kudlow, the president’s economic advisor, announced. CNBC analyst Jim Cramer told the cable network’s viewers, “This is what a boom looks like.” Manufacturing “activity right now is hitting on all cylinders. Demand is up, production is up,” says Chad Moutray, chief economist at the National Association of Manufacturers.

Federal Reserve Board chairman Jay Powell used only slightly less enthusiastic language in his reports to Congress this week. “The job market has continued to strengthen . . . the U.S. economy has grown at a solid pace . . . rising after-tax incomes . . . optimism among households . . . investment by businesses has continued to grow at a healthy rate . . . financial conditions remain favourable to growth.” As former Fed governor Larry Lindsey summarized it, “This is Goldilocks.”

There’s more, and better. Kudlow took a whirl around the floor with that old seductress and dance partner from pre-recession days, Rosy Scenario. We can create another 5 million to 10 million; sensible policies can end the productivity slowdown; more tax cuts are coming and, although they will lose revenues in “the very short run [they are] like investing in a business, you may have to borrow to make a good long-term investment . . . we’ll get it back and more . . . you’ll get your 4 percent to 5 percent GDP growth.” When the Commerce Department raised its estimate of retail sales in May and June, Macroeconomic Advisers and Natwest, among others, upped their estimates of second-quarter GDP growth to Kudlow’s 4 percent.

Beware exuberant consensus. Retain a dollop of skepticism. Start with the boom in the rate of economic growth. It is difficult to tell how much of that growth is due to the so-called Trump tax cuts, which brought down the rate charged America’s corporations and increased the portion of their pay checks that workers get to keep from the tax collector. So confident are Trump and his advisors that tax cuts pay for themselves that they are considering another reduction-Tax Reform 2.0-which might include a reduction in capital gains taxes, and make permanent the temporary cuts enacted in round one.

But-a colleague of mine considers “but” to be the most powerful word in the English language-Jay Powell told a congressional committee, “U.S. fiscal policy has been on an unsustainable path for some time. It continues to be unsustainable.” Kudlow might consider rising deficits that are due to hit 5 percent of GDP a good investment, but in the likely event that the administration is being overly optimistic about the ability of the tax cuts to pay for themselves, the nation’s total debt will hit 100 percent of GDP.

Which seems increasingly likely. The White House Office of Management and Budget (OMB) forecasts that deficits will reach $1.085 trillion in fiscal 2019, double the $526 trillion OMB predicts for the fiscal year ending September 30. The last time the deficit hit $1 trillion was during a serious economic slowdown, and prompted the institution of spending caps and other measures. Now, “during a period of economic strength-when we should be saving for future downtrends-few seem even to take notice. . . . Debt will overtake the size of the entire economy in about a decade” notes the bipartisan Committee for a Responsible Federal Budget.

Most economists agree that a pile of IOUs that high will stifle economic growth by raising interest rates and inflation, and producing myriad economic distortions. After all, if unlimited borrowing, financed by printing money, were a path to prosperity, then Venezuela and Zimbabwe would be top of the growth tables.

The next piece of good news to consider is the low 4 percent unemployment rate. But, it is so low it might place a limit on future growth. The president’s Council of Economic Advisers last week reported, “There simply aren’t enough unemployed workers in the current pool of those looking for work to match the growth in demand for new workers.” Many workers who have dropped out of the labor market simply do not have the skills to take on the available jobs, should they decide to give up benefits in favour of pay checks. And it does not pay any single employer to train them, as they might move on to other companies, which the rising quit rate-Take Your Job and Shove it, to use the technical term-suggests is a real possibility. In short, the economy cannot grow at the rate of this and the next few quarters unless employers can find skilled workers-or docile robots. Which would create its own problems.

Then there is the problem of the multi-front trade war that America is now waging. If Trump’s trade policy “results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too,” warns Powell. Until recently there was reason to believe that Trump’s tariffs were merely a tactic to wring concessions from the Chinese. But according to Kudlow that prospect is dimming. He reports that on his trips to Beijing with the administration’s trade team, Chinese premier Li Keqiang and others on the Chinese side agreed to “significantly raise” access by foreign companies to China’s markets. Only to be overruled by Xi Jinping.

That report, shot back China’s foreign ministry, is “distorted . . . bogus . . . beyond imagination.” In any event, there are no ongoing negotiations while the clock ticks down to early September, when another $200 billion in tariffs on Chinese goods will come into force. Several businessmen I spoke with are preparing for a permanent new world order of high tariffs.

Xi, who has kept tariffs high and access to China’s market low, and presides over an economy built in good part on stolen intellectual property, continues to claim to be a champion of free trade. In 1906, Gerald Balfour (brother of Arthur) claimed in the House of Commons to be prepared to fight for free trade by using retaliatory tariffs when necessary. Winston Churchill, who opposed retaliation, responded, “I wonder what would happen to Free Trade if it had been left alone in a dark lane with such a champion as that!”

Or, today, such as champion as Xi.