Ring out the old. Please. Only 18 percent of Americans say things got better for the country in 2016 than they had been in 2015. Ring in the new. Please. Some 55 percent of Americans expect 2017 to be better for them than was 2016, up twelve points on last year’s poll. Consumer confidence is at a 15-year high, and this holiday season “American consumers … are shopping at a rate not seen since the mid-2000s,” according to Craig Johnson, president of Consumer Growth Partners, a research firm.
The crowd that is glad to see 2016 come to an end includes thousands who pleaded with their overworked psychiatrists and analysts on our two coasts for appointments to help them manage their rage or grief at the fact that the Republican’s appalling candidate bested the Democrats’ appalling candidate, who is blaming her defeat on the Russians, and those horrid F’s: Fox News, FBI, and Founding Fathers who devised an electoral system that prevents large-population states from determining the outcome of our elections.
The majority of Americans are optimists, buoyed by a mix of no-more Obama progressivism, no-more Clinton scandals, and Trump-promised policy initiatives that signal the end of the leftward lunge of American politics: repeal and replacement of Obamacare, an end to the attack on the fossil fuel industries, tax cuts, renegotiation of trade agreements, a rebuilding of our military. The pendulum that took a hard swing to the left in 2008 is about to take an equally hard swing to the right before resting, perhaps in 2020 or 2024, somewhere in between.
Two factors make this optimism a real problem for the incoming president. First, by taking credit for the run-up in share prices since his election, Trump has taken ownership of the inevitable decline. Second, expectations that 2017 will be better than 2016 come after a year in which the economy did not do poorly, setting a high bar for Trump.
- The economy added over 2 million jobs,
- The unemployment rate fell to 4.6 percent, and applications for new unemployment benefits have been below 300,000 for 95 weeks, the longest such streak since 1970,
- Inflation was tame,
- Auto production was at record or near-record levels,
- Sales of new homes rose 16.5 percent year-on-year, and of existing homes hit a near-10-year high, while house prices rose by about 5 percent, and
- Third-quarter GDP growth came in at 3.5 percent, the highest in two years.
Top that, Donald Trump! Which is what he plans to do. Forget about three of the policies he expects to drive growth this year to levels not seen in sixteen years. The first is a bonfire of regulations; the second a renegotiation or abrogation of trade agreements, and higher tariffs —fairer trade to some, protectionism to others; the third is his infrastructure program.
Trump and his cabinet will try to roll back many—I hope not all—of the thousands of regulations added during the Obama era. Some will be gone with a stroke of the presidential pen; others will be eliminated only after protracted legal proceedings; many will survive. But no matter how consuming the bonfire, and how important the long-run contribution of unshackling American business proves to be, the immediate effect on growth and jobs is likely to be minor.
So, too, with trade agreements. The president does have significant discretion over tariffs and various restraints on imports, and will undoubtedly continue to attack companies that export jobs. But many manufacturing jobs created for American workers are likely to be offset by the continued march of the robots and other technologies.
The third plan that will have little effect, at least this year, is the president-elect’s infrastructure program. For one thing, there just aren’t many shovel-ready projects waiting for funding. For another, the plan depends on the ability of Steve Mnuchin, Trump’s pick for treasury secretary, to develop tax incentives that will induce private-sector investors to build roads, repair bridges and refresh airports in the hope of turning a profit from tolls and user fees. Few such ventures have ever succeeded.
Trump’s success in backing his promises with results depends on two things. First, whether he and his mostly businessman’s cabinet—combined net worth $10 billion—can create an atmosphere that encourages businesses to step up investment in new plant and equipment. If the post-election boom in share prices is any indication, we are already seeing what Keynes called “spontaneous optimism … animal spirits”, unleashed in anticipation that Trump’s business-friendly, growth-oriented economic policies will generate higher corporate profits and, by extension, higher investment, more jobs and rising incomes.
Second, whether he succeeds in reducing the corporate tax rate from 35 percent to between 15 percent and 20 percent, and lowering personal taxes. Two problems. He faces opposition from Mnuchin to his plan to lower taxes for everyone. Mnuchin wants top earners to give back in lost deductions every dollar they save from lower rates. And Congress wants a say in the matter. House Speaker Paul Ryan’s Republicans oppose enlarging the deficit, and will be looking for cuts in various entitlement programmes to make up for any lost revenue that will not be recovered by more rapid growth. But Trump has promised not to reduce social security and Medicare, two of the largest entitlement programmes, and to fund six weeks of paid maternity leave and subsidies for child care, as advocated by his daughter. Ryan has the votes, Ivanka her father’s promises.
So are the optimists right? Probably. Trump will get a good part of his tax plan, animal spirits will prevail for a while, and growth will accelerate. But only “probably” because two important drivers of economic growth are showing signs of fatigue. The auto industry is closing factories until inventories are whittled down, and maintaining its exuberant sales pace only by wide discounting and providing credit to less credit-worthy buyers, causing a rise in repossessions.
And the housing industry is feeling the effects of the Fed’s monetary policy committee’s promise to follow up December’s rate increase with three more in 2017. Interest rates on 30-year fixed-rate mortgages have risen to 4.2 percent from 3.5 percent on election day, driving the industry’s canary-in-the-coal-mine, pending home sales—contracts signed but sale not yet closed—down to its lowest level since last year at this time.
If interest rates and the dollar do not soar, and consumer and business confidence remain high, the odd combination of Keynesian tax cuts and associated deficits, conservative deregulation, and ad hoc presidential interventions just might prove the optimists right. It wouldn’t be the first time capitalism has shown an ability to adjust to new realities.
I would like to thank those of you who have been kind enough to comment on these weekly pieces, especially those who have disagreed without being disagreeable.