The secular stagnation of the American economy over this century helped propel Donald Trump into the White House. So far President Trump is popularly credited with achieving some improvement in the US economy, but the economic outlook may well have deteriorated by the time of the next US election.
The US House of Representatives investigation into whether Trump tried to secure a personal political advantage by bribing the Ukrainian Government doesn’t seem to have shaken his hard-core support among Republicans; or at least not so far, despite the damning evidence produced.
Instead, if Trump is to be defeated at the next Presidential election, just 12 months away, that may depend more upon the state of the US economy. After all, Bill Clinton won almost thirty years ago with his insistence that: it’s the economy stupid.
In Trump’s case, his support is heavily dependent on working class white voters from the rust belt who perceive a long-term decline in their living standards, economic security and social status. Identity political issues resonate with these people, as they seek to blame others – especially foreigners, both overseas and immigrants – for their perceived difficulties.
Trump clearly panders to these disgruntled workers, but the acid test may be his ability to improve their employment prospects and incomes. And rightly or wrongly Trump is widely perceived as having lifted US jobs and growth, which must help maintain his support, and especially his hard-core support.
Certainly the US unemployment rate is now down to less than 4 per cent, which is the lowest since the early 1960s, and one of the lowest unemployment rates in the OECD. In addition, last year the US economy grew by 2.9 per cent, which was faster than in most recent years, and faster than the OECD average.
Accordingly, there is some substance for the popular impression that the US economy is stronger and has performed solidly during the Trump Presidency.
However, although employment has increased faster than the workforce in the three years since Trump became President, the average annual growth rate of employment over this three-year period at 1.3 per cent was less than the average annual rate of increase in employment of 1.7 per cent over the previous three years.
Furthermore, the employment participation rate for males and females aged 15-64 are now 79.2 per cent and 68.2 per cent respectively; less than the participations rates of 80.4 and 69.0 for males and females respectively in 2009. By comparison, these US employment participation rates area also 4½ percentage points below the equivalent participation rates in Australia, whereas at the beginning of this century, employment participation was 5 percentage points higher in the US.
In short, much of the reduction in US unemployment must be due to displaced workers giving up and leaving the workforce.
In addition, real wages per employee are still not increasing, and it is likely that the trend to increased inequality in the distribution of earnings is continuing. As a result, the typical American male continues to make less than he did 45 years ago (after adjusting for inflation), and less than his grandfather. So the American dream that if you work hard you will be better off continues to be no longer true for most Americans.
But what probably matters most is the future outlook for the US economy and jobs, and here there are good reasons for concern.
Already there are signs that the US economy is stalling. That is why the Federal Reserve has reversed its monetary policy and has undertaken three interest rate cuts so far this year.
The latest forecasts by both the IMF and OECD are that the US economy will only grow by a little over 2 per cent in 2019 and by even less in 2020. In addition, although manufacturing only accounts for less than 10 per cent of American GDP, it has a special resonance with Trump supporters, and manufacturing production has been falling since the beginning of this year.
Furthermore, the downside risks to the IMF and OECD forecasts are considered to be substantial. A principal concern is the uncertainty that has resulted from the trade dispute with China, and how this is damaging investment. According to the OECD, if the trade measures remain unchanged then those “increased tariffs and associated retaliation may reduce US GDP by ½ percentage point in 2021”.
Another concern is that the authorities have only limited room to take expansionary action. The scope for further interest rate cuts is limited, and additional balance sheet operations by the Federal Reserve will face criticism that they mainly increase asset prices and not activity. On the other hand, the current valuation of US shares relative to company earnings can only be justified by the present low interest rates, and it may well be that some form of quantitative easing will be needed in future to resist a financial melt-down.
As regards the scope for further fiscal stimulus, the US Government is already running very substantial budget deficits, which are projected to rise to nearly 7 per cent of GDP in 2021. In addition, general government gross financial liabilities in the US presently amount to 108 per cent of GDP.
By comparison, the Australian Government’s budget is in balance, and the gross financial liabilities of the general government sector in Australia only amount to 40 per cent of GDP. In other words, the Australian Government has far more fiscal room of manoeuvre than the US, but even so the Australian Government is reluctant to use fiscal policy aggressively.
On the other hand, I don’t think that the US (or the Australian) problems are primarily cyclical. Instead, I think the slow economic growth, mainly reflects structural problems caused by low growth in household incomes, which in turn results in low investment and low productivity.
The best response to these problems doesn’t require the government to go deeper into debt. Rather, what is needed is a change in the structure of the US government budget in favour of a more equitable distribution of income, including more equitable access to key public services, such as education and health.
This type of response, which would really help the core Trump working class supporters, may well require a tax increase, especially on higher incomes. But I imagine that will not happen, and instead, it is very likely that the US economy will be seen to be stagnating when the US election takes place in 12 months’ time.
Whether that stagnation will be sufficient to shake Trump’s supporters’ faith in his claim to economic excellence is the 64 million dollar question to which we don’t know the answer yet.
Michael Keating is a former Head of the Departments of Prime Minister & Cabinet, Finance, and Employment & Industrial Relations. He is presently a Visiting Fellow at the Australian National University.