The economy has been chugging along at about 2% annual GDP growth ever since the end of the Great Recession in June 2009. Unemployment has been steadily dropping and is now a fairly low 4.4%. Low wage earners are now even beginning to see bigger gains in pay.
Most people would like to speed up economic growth even more. Tax reform will help in this regard but so will sensible deregulation. Barron’s has an excellent article this week about deregulating Wall Street by William D. Cohan.
According to Mr. Cohan:
GDP growth is highly correlated with bank lending.
The Dodd-Frank Act, passed by Congress in 2010, has disproportionately burdened community banks, despite their having no role in the financial crisis.
More than 1700 U.S. banks have disappeared since Dodd-Frank was passed.
Senator John Kennedy (R, LA) has introduced a bill which would exempt community banks and credit unions with assets of less than $10 billion from the Dodd-Frank Act.
As a result of Dodd-Frank, big banks are now required to have more capital and less leverage. Today a bank’s assets would have to fall about 7% before a bank’s capital would be wiped out, as opposed to only 2% in 2008. This makes them safer.
Prior to 1970 the Wall Street partnership structure ensured that bankers had plenty of skin in the game – essentially their full net worth was on the line every day.
Today bankers and traders are rewarded for taking risks with other people’s money. Mr. Cohan recommends that the top 500 traders and executives at every big bank have a significant portion of their net worth on the line.
Conclusion. Mr. Cohan’s program would not only give a big boost to the economy by enabling community banks to lend more freely but would also make our financial system safer by requiring top financiers to have skin in the game.
President Trump’s budget for 2018 presents a plan to achieve a balanced federal budget in ten years, by 2027. This is a highly desirable goal but there is much skepticism about whether or not his budget is realistic, see here and here.
My thoughts on this important matter are:
Fiscal restraint is a common sense necessity, and is not austerity. Our public debt (on which we pay interest) now stands at 77% of GDP, the highest since WWII, and will continue to increase without major changes in public policy. Right now the debt is almost “free” money because interest rates are so low. As interest rates inevitably go up in the near future, interest payments on the debt will skyrocket and become a huge drain on our federal budget and make annual deficits even worse than they already are.
3% annual GDP growth, as assumed in the Trump budget, is almost certainly too optimistic. However the Trump Administration is on track to achieve significant deregulation and averaging 2.5% growth over the next ten years is doable.
Insufficient entitlement reform is a big drawback for the budget. It will be very difficult, essentially impossible, to achieve and sustain a balanced budget without modifying Social Security and Medicare to make them self-financing. Turning Medicaid into a block grant program to the states would finally put Medicaid on a sensible budget.
Requiring able-bodied welfare recipients to work is a good idea and is the basis for cutbacks in social welfare programs.
The Departments of State, Interior, Education and Justice should be able to absorb cutbacks and operate more efficiently.
Conclusion. There are many good initiatives built into the Trump budget. Unfortunately there are also some invalid assumptions and glaring omissions. It does not represent a bona fide plan to balance the budget in ten years but at least it recognizes the importance of doing so.
Both President Trump and the Republican Congress want the economy to grow faster than the slow 2% growth which we have experienced since the Great Recession ended in June 2009. The Congressional Budget Office predicts (see chart below) that growth will average just 1.8% over the next ten years under current policy.
Immigration reform, .3%, by increasing the number of workers.
Tax reform, .18%, if well designed. However, deficit-financed tax reform would ultimately harm growth.
Increase the Social Security retirement age by two years, .15%, by keeping people in the workforce longer.
Reduce deficits by $4 trillion over ten years, .1%. This is enough deficit reduction to put our debt on a sustainable, downward path.
Continue expanding energy production at the shale boom level, .09%.
Repeal of the Affordable Care Act, .08%, will keep more people in the workforce.
Ratifying the Trans Pacific Partnership, .01%, by increasing foreign trade.
Increasing public investment in infrastructure, education and research by $40 billion per year, .1%.
Note that all of these changes would increase growth by an estimated .83% of GDP per year. Added to the 1.8% base this yields a growth rate of 2.63%. Unfortunately, many of these reforms are unlikely to occur. On the other hand, various deregulatory actions being taken by the Trump administration are likely to increase growth by an unknown amount.
Conclusion. It is reasonable to anticipate that growth can and will be speeded up to about 2.5% of GDP per year under the Trump administration. Along with the tight labor market now developing (current unemployment rate of 4.4%), blue-collar and other middle class workers should continue to receive decent pay increases for the foreseeable future.
Donald Trump assumes office with perhaps the lowest favorability ratings of any modern president. According to the New York Times,
Mr. Trump’s approval rating is only 40% among all adults and just 46% among likely voters.
But a recent CNN poll reports that 48% of adults think he’ll do a good job as president and 61% think he’ll bring back well-paying jobs to economically depressed areas.
Contrast this with Barack Obama’s latest poll ratings:
According to Gallup Mr. Obama leaves office with an approval rating of 57%.
But Rasmussenreports that only 35% of likely voters think the country is heading in the right direction (with 55% saying that we’re headed in the wrong direction).
I interpret this to mean that the country is largely turned off by Mr. Trump’s crude speech and sleazy behavior, while still liking his economic program. On the other hand, voters like Mr. Obama personally while disapproving of many of his policies and accomplishments.
All of this leaves Mr. Trump in an amazingly good political position:
With unemployment currently at a relatively low 4.7% and the economy fully recovered from the Great Recession, even modest reform in tax policy coupled with energy, healthcare and financial deregulation could provide a significant boost to long stalled economic growth.
He is criticized for having no clear cut political philosophy but this means he is free to do whatever makes good sense regardless of ideology. This will be a huge advantage in working with both parties to get things done.
He has nowhere to go but up in the polls. Such an increase in personal popularity will create the semblance of forward momentum.