“Secular Stagnation” Continues

There’s no reason to celebrate Trump’s (not so) “amazing” growth rates.

BY JOHN MILLER| September/October 2018

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

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So much for “secular stagnation.” With Friday’s report of 4.1% growth in the second quarter, the U.S. economy has now averaged 3.1% growth for the last six months and 2.8% for the last 12. The acceleration has been driven by business investment, which increased 6.3% in 2017 and has averaged 9.4% in the first half of 2018.

The same people who said this growth revival could never happen are now saying that it can’t last.

But there are reasons to think that a 3% growth pace can continue. The investment boom will drive productivity gains and job creation that will flow to higher wages and lift consumer spending.

—The Editorial Board, “The Return of 3% Growth: Tax reform and deregulation have lifted the economy out of the Obama doldrums,” Wall Street Journal, July 28, 2018.

The Wall Street Journal editors may think that Trump’s “amazing” growth rates, as the president refers to them, have vanquished secular stagnation from the U.S. economy.

But “secular stagnation,” a long-term (or “secular”) slowdown in economic growth, is not behind us. Rather, healthy economic growth and financial stability remain incompatible in today’s economy—a tell-tale sign of secular stagnation. On top of that, the Trump economy has failed to lift wages as it has showered riches on those who need them the least, making today’s gaping inequality yet worse.

Secular Stagnation Continues

Economic growth rates have indeed picked up in the last year. But those growth rates are neither unprecedented nor as stellar as the editors and the president make them out to be. For instance, in 2014, during the Obama administration, the economy posted two consecutive quarters of economic growth that topped Trump’s second-quarter 4.1% growth rate— yet the editors did not declare the end of secular stagnation. And the 2.8% economic growth rate the economy averaged over 12 months in 2017 and 2018 is hardly something to crow about. That is slower than the 2.9% growth rate the U.S. economy has averaged of over the last seven decades, and far slower than the 4.3% and 3.6% average growth rates of the long economic expansions of the 1960s and 1990s, respectively. Finally, the current pick-up in economic growth began in the second half of 2016, before Trump came to office, and that upward trend has not accelerated in the last year and a half. On top of that, real private investment during the Trump administration has grown more slowly than it had from 2010 to 2016, during the Obama administration.

Nor does the secular stagnation hypothesis suggest that economic growth rates would never accelerate. Rather, secular stagnation occurs when a chronic lack of demand—a shortfall of spending—has slowed long-term economic growth to the point where “it may be impossible to achieve full employment, satisfactory growth and financial stability simultaneously simply through the operation of conventional monetary policy [that lowers interest rates],” as economist (and former treasury secretary and World Bank chief economist) Lawrence Summers, who has championed the secular stagnation hypothesis, has put it.

Today unsustainable finances and extraordinary economic stimulus are masking the inability of the economy to maintain faster growth rates. Under the Trump administration, the federal government has slashed taxes for corporations and the rich, boosted spending on the military, and driven up the federal budget deficit. The deficit is on course to reach $1 trillion or 5.1% of GDP by fiscal year 2019 according to the White House, unprecedented levels for an economy in the midst of a long-running economic expansion. Along with that fiscal stimulus, interest rates (which determine the cost of borrowing) remain low by historic standards, despite the Fed’s multiple increases of its benchmark interest rate, the Fed Funds rate, since December 2015. The Fed Funds rate is still just under 2%, well below its 5.0% rate in 2007 on the eve of the Great Recession.

Growing signs of financial instability also haunt today’s economy. A spate of corporate borrowing enabled by low interest rates has more than doubled U.S. corporate debt (total debt of nonfinancial corporations) from 2007 to the end of 2017, according to the McKinsey Global Institute. With higher interest rates that corporate borrowing becomes more costly and unsustainable for some corporations with a high debt burden. In addition, increased volatility returned to the stock market this year after a long period of nearly uninterrupted rising stock prices. The editors dismissed the increased volatility as little more than the “return of normal risk.” But stock-market prices have stagnated since then, no higher in the beginning of August (measured by the S&P 500) than they had been in the end of January.

Economic Malnourishment

Trump insists that the more recent economic growth is “very sustainable,” but most economists disagree. Even the Wall Street Journal survey of 60 economists, which does foresee the economy growing at a 3.0% rate in the second half of this year, has economic growth slowing to 2.4% for 2019. And former Fed Chair Ben Bernanke believes that by 2020 Trump’s over- stimulated economy “is going to go off the cliff,” much like the cartoon character Wile E. Coyote. If the current trade conflict worsens, it could push the economy into a recession before that.

Beyond concerns about financial fragility and whether the current fiscal and monetary stimulus can be sustained, economists have seized upon one-time factors that pushed up the second-quarter economic growth rate. The most important of those is the surge in exports, which accounted for one quarter of the growth during the second quarter. Much of the surge came from importers snapping up U.S. exports before their countries imposed tariffs in retaliation to Trump’s tariffs. Chinese pre-tariff purchases of U.S. soybeans alone added 0.6 percentage points to the economic growth rate, according to Pantheon Macroeconomics.

The other is the strong consumer spending that pushed up the second-quarter growth rate. The largely pro-rich Trump tax cut added some money to the take-home pay of even less-than-well-to-do taxpayers, which helped to boost consumer spending. That level of consumer spending, however, is unlikely to continue. U.S. consumer debt has now reached $13.3 trillion, more debt than on the eve of last decade’s financial crisis, and higher interest rates will increase that debt burden. Finally, the net worth of all but the richest 10% of households remains below its level prior to the 2008–2009 financial crisis. One-off increases in exports and consumer spending goosed the quarterly economic growth rate, but putting an end to secular stagnation requires a steady diet of increased investment and consumer spending. That’s not being served up by the Trump economy.

Slashing corporate taxes has not generated an investment boom. During the second quarter of 2018, housing investment continued to slump, and spending on new equipment, the largest component of investment, grew only half as quickly as it had at the end of 2017, prior to the tax cut. Business investment in structures such as office buildings and factories did increase far more quickly than before the tax cut. But most of that spending went into oil and gas drilling spurred on by higher world energy prices.

The majority of the profits freed up by cutting corporate taxes have gone to buying back stocks, dividends, and other payments to investors. The current torrent of stock buybacks, according to Goldman Sachs estimates, is on track to reach $1 trillion and surpass the buyback bonanza in 2007 on the eve of the Great Recession by year’s end. That’s $1 trillion that will not go to domestic investment that might have created jobs, lifted wages, and boosted productivity. Nor will those stock buybacks help most workers, who own little or no stock.

Workers’ wages have continued to stagnate during the Trump administration. Trump’s Council of Economic Advisors promised that an “immediate jump in wage growth” would follow their tax giveaway to the rich adding more than $4,000 of income to the typical family. But corrected for inflation, average hourly earnings of all private nonfarm employees were just 0.6% higher in June 2018 than when Trump took office. Six months after the tax cut, workers’ purchasing power is no higher, and consumers are less wealthy and

Not Just Economics

In the last analysis, the secular stagnation problem is a political problem rather than an economic one. With sufficient political will—and political might—we could enact a program that would put an end to secular stagnation, reduce inequality, and improve the lot of most people.

Large-scale public investment could make up for the persistent shortfall of private investment. The People’s Budget of the Congressional Progressive Caucus (CPC) proposes a $2 trillion program of much needed public investments—about the cost of the Trump tax cut and his increase in military spending. That infrastructure spending could clean up drinking-water pipes, update our energy grid to support renewable power resources, support public transportation, expand broadband, and rebuild public schools.

Nor is wage-stagnation an economic phenomenon alone. The National Labor Relations Board has undermined unionization at the same time the federal government has failed to enforce existing labor laws. Trump has put a freeze on pay increases for federal workers. State governments have overturned local pro-labor regulations, from raising minimum wages to mandating paid leave to establishing fair scheduling. Undoing those anti-labor policies and facilitating unionization is key to improving the bargaining power of workers and overcoming wage stagnation.

Those measures, unlike the Trump policies endorsed by the WSJ editors, could truly put an end to secular stagnation.

is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

Steve Rattner, “Testimony the House Ways and Means Committee,” May 16, 2018; Lawrence Summers, “What to do About Secular Stagnation,” World Economic Forum, Oct. 31, 2014; Budget of the U.S. Government, Fiscal Year 2019: Mid-Session Review, Office of Management and Budget, July 13, 2018, Table S-1; Susan Lund, et al., “Rising corporate debt: Peril or promise?” Discussion Paper, McKinsey Global Institute, June 2018; “The Return to Normal Risk,” Wall Street Journal, February 5, 2018; Wall Street Journal Economic Forecasting Survey; Craig Torres, “Bernanke Says U.S. Economy Faces a ‘Wile E. Coyote’ Moment in 2020,” Bloomberg Businessweek, July 7, 2018; Paul Kiernan, “U.S. Soybean Exports Surged Last Quarter,” Wall Street Journal, July 6, 2018; “Household Debt and Credit Report (Q2 2018),” Center for Microeconomic Data, Federal Reserve Bank of New York; Josh Zumbrun, “Household Borrowing Hits High,” Wall Street Journal, Aug. 15, 2018; “Feel That Post-Recession Bounce,” New York Times, Sept 27, 2017; Grep Ip, “A Solid Economy With Room to Run,” Wall Street Journal, July 28, 2018; “Stock Prices Defy Surge in Buybacks,” Wall Street Journal, July 9, 2018; Lu Wang, “Forget Apple, Goldman Says, Flagging New $1 Trillion for S&P 500,” Bloomberg Businessweek, August 6, 2018; Heather Long, “The average American family will get $4,000 from tax cuts, Trump team claims,” Washington Post, Oct. 16, 2017; “Worker Rights Preemption in the US,” Economic Policy Institute, September 2017; “The People’s Budget: A Progressive Path Forward FY 2019,” The Congressional Progressive Caucus.

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