Back in September, Donald Trump stoked controversy when he argued the Federal Reserve’s low interest rate policy was politically motivated, aimed at helping Democrats in this year’s election. In fact, the minutes detailing the Fed’s September 20-21 meeting succinctly stated why we need to elect Trump president.
At the meeting, “the staff slightly lowered its assumption for potential output growth over the medium term and in the longer run” while meeting participants saw “a slower pace of trend output growth.” Federal Reserve leaders slashed their estimate of long-term potential real growth, which is akin to an economy’s speed limit, down to 1.8% - the first time it has ever dipped under 2%.
Back in 2009, the Fed saw potential real growth of 2.6%. Bear in mind that over the past 60 years GDP growth has averaged north of 3%.
Not only has the Obama economic recovery been the slowest once since World War II, it has caused structural damage to the US economy that puts the nation on a path of decline. Now 2% trend growth may not sound all that different than 3% (a discussion about a 1% change may not seem sexy), but it really does add up over time. Today, the US economy is $18.45 trillion, and over 25 years that incremental 1% would compound to $8 trillion of additional annual output. That is over $20,000 for every man, woman, and child.
The structural impairment of the economy’s potential gets at the heart of Trump’s “Make America Great” pledge. A slower economy means lower living standards, families falling behind, and a government that struggles to meet its commitment at home and abroad - attributes we associate with a nation in decline. Recognizing that federal tax revenue has generally been 15-20% of GDP, that additional $8 trillion of output means another $1.2-plus trillion of tax revenue.
With that extra revenue, we can more easily navigate rising Social Security and Medicare payments while maintaining a military that is the envy of the world.
Sadly, the Federal Reserve is really just catching up to a reality that American workers have been living for years: that the economy isn’t working like it used to. Real median household income rose 5% in 2015 back to levels seen in 1998. That’s right; during the past 17 years, the median American has seen no income gains. Manufacturing employment has declined by 5 million people - an average of 800 job cuts per day. No wonder the middle class feels squeezed.
Some suggest the hollowing out of our industrial base was a necessary side-effect of trade deals that boost growth in the aggregate. The stated purpose of these deals is to get American companies access to fast growing international markets. Why, then, has import growth exceeded export growth by thirty percentage points since NAFTA began in 1994? If exports had grown just as fast as imports, they would be $350 billion higher. Isn’t it possible that a government that struggles to run VA hospitals competently doesn’t negotiate trade deals particularly well?
What has made America great is a social compact that the each generation does better than the one before it; that is the basic tenet of the American dream. Lower potential growth threatens this hope for my generation. For two decades, workers have enjoyed minimal gains and poor trade deals have left money on the table. Under the Obama Administration, these trends have worsened as he has pursued higher taxes and European-style regulations of our healthcare and financial sectors. Italy’s economy is smaller today than fifteen years ago and youth unemployment in the Euro area is over 20%. The European experiment should be a warning - not a model.
The Federal Reserve (which is by no means in the tank for Trump) validates his message: on our current course, my generation will not enjoy the gains in income and living standards that past generations have. With the right policy mix, I believe we can accelerate the American economic engine.
Thanks to Dodd-Frank’s overreach, banks are carrying over $2 trillion in excess cash; imagine if we carefully rolled back some regulations so banks could lend to new businesses. Imagine if we made it easier for companies to take the $2.5 trillion in cash overseas and invest it here. When these productivity-boosting pro-capital policies are combined with Trump’s pro-labor trade, manufacturing, and tax policies, what forms is a potent recipe to get America out of its economic malaise.
Unlike the Federal Reserve, I don’t think America’s potential has been diminished. Betting against this country has never been wise. We just need to elect a president who will unleash our potential rather than temper it.