(What’s Left of) Our Economy: New Reminders of Why Growth’s Quality Mustn’t be Ignored

Tags

an economy built to last, business investment, capex, CBO, Congressional Budget Office, debt, Financial Crisis, GDP, growth, manufacturing, NABE, National Association of Business Economics, tariffs, Tax Cuts and Job Act, Trade, {What's Left of) Our Economy

For years I’ve been beating the drum about the need for American to pay as much attention to the quality of growth generated by the economy as they pay to the rate of growth itself. And in just the last 24 hours, two great examples have emerged of how ignoring the former can produce worrisomely off-base policy conclusions.

To repeat, the quality of growth matters because even growth that seems satisfactory, or even better, on a quantitative basis can be downright dangerous if its composition is wrong. Go back no further into the nation’s economic history than the last financial crisis to see why. Excessive reliance on intertwined housing, personal consumption, and credit booms nearly led to national and global meltdowns because, in former President Obama’s apt words, America became a “house of cards” overly dependent for growth on borrowing and spending. And he rightly emphasized the need to recreate an economy “built to last” – i.e., one based more on investing and producing.

In numerous posts, I’ve documented how little progress the nation has made in achieving this vital goal. And new reports by the Congressional Budget Office (CBO) and the National Association for Business Economics (NABE) valuably remind of one big reason why: This crucial challenge remains largely off the screen in government, business, and economics circles.

The new CBO study is its annual projection of U.S. federal budget deficits and federal debts, and the agency helpfully describes in detail the economic assumptions behind these forecasts. One key finding concerned the impact on American growth of the Trump administration’s various tariffs on certain products and U.S. trade partners.

Largely echoing the conventional wisdom, CBO predicted that if the levies remained unchanged, the tariffs would “reduce U.S. economic activity primarily by reducing the purchasing power of U.S. consumers’ income as a result of higher prices and by making capital goods more expensive. In the meantime, retaliatory tariffs by U.S. trading partners reduce U.S. exports.”

Specifically, according to CBO, “new trade barriers will reduce the level of U.S. real GDP by roughly 0.1 percent, on average, through 2029” – although its economists acknowledged that the estimate “is subject to considerable uncertainty.”

So that sounds pretty like a pretty counter-productive outcome for the President’s trade policies. But check out what else CBO said about the short-term impact of new U.S. tariffs. “Partly offsetting” the negative effects of those rising prices, along with the damage done by retaliatory foreign tariffs, the levies will also

“encourage businesses to relocate some of their production activities from foreign countries to the United States….In response to those tariffs, U.S. production rises as some businesses choose to relocate their production to the United States. In the meantime, tariffs on intermediate goods encourage some domestic companies to relocate their production abroad where those intermediate goods are less expensive. On net, CBO estimates that U.S. output will rise slightly as a result of relocation.”

In other words, the Trump tariffs will lower overall growth a bit, but more of that growth will be generated by domestic production, rather than by consumers and businesses purchasing more imports – primarily financed of course with more borrowing, and boosting debts. For anyone even slightly concerned with the quality of growth, that could be an acceptable price to pay for a healthier American economy over the long run.

Over the longer run, CBO speculates that the tariffs will reduce private domestic investment and productivity (and in turn overall growth), though it admits that this outlook is even more uncertain than that for the short run. Moreover, it’s easy to imagine public policies that could negate considerable tariff-related damage. For example, if the trade curbs do indeed undermine productivity in part by reducing the competition faced by domestic businesses – and therefore reducing their incentives to continue to improve – more overall competition could be restored through more vigorous anti-trust policies. So the tariffs could still result in growth that’s somewhat slower, but more durable.

The NABE’s January survey of members’ companies painted a pretty dreary picture of another Trump initiative – the latest round of tax cuts. As reported by the organization’s president, “A large majority of respondents—84%—indicate that one year after its passage, the 2017 Tax Cuts and Jobs Act has not caused their firms to change hiring or investment plans.”

As a result, even though the sample size was pretty small (only 106 companies responded to the organization’s questions), these answers significantly undercut tax cut supporters’ claims that the business-heavy reductions would lead to a capital spending boom.

Yet a closer look at the results offers greater reasons for (quality-of-growth-related) optimism. And they represent some evidence that the tariffs are achieving intended benefits as well. In the words of NABE’s president, “The goods-producing sector…has borne the greatest impact, with most respondents in that sector noting accelerated investments at their firms, and some reporting redirected hiring and investments to the U.S.”

This goods-producing sector includes manufacturing, and its outsized reaction to the tax cuts makes sense upon considering how capital-intensive industry has always been. In addition, manufacturing dominates U.S. trade flows, so it makes perfect sense that the tariffs’ jobs and production reshoring impact has been concentrated in this segment of the economy.

And once again, the bottom line seems to be more growth spurred by more domestic production – which can only improve the quality of the nation’s growth, and the sustainability of its prosperity.

Of course, the best results of new American economic policies would be the promotion of more and sounder growth. But as widely noted, big debt hangovers resulting from financial crises make even pre-crisis growth rates difficult to achieve even when quality is ignored – as the specialists quoted in this recent New York Times article appear to admit. So in order to achieve the best long run results, Americans may need to lower their short-term goals and expectations somewhat. That greater realism – and sharper focus – will surely come a great deal faster if important institutions like the CBO and the NABE start paying them at least some attention.

(What’s Left of) Our Economy: Trump Tariffs Will Devastate American Businesses? Seriously?

Tags

China, Heritage Foundation, inputs, Investors Business Daily, manufacturing, Obama, productivity, profits, regulations, regulatory reform, tariffs, Tax Cuts and Job Act, Tax Foundation, taxes, Trump, {What's Left of) Our Economy

Since the Trump administration’s actual and potential tariffs became an issue,  opponents (including many American businesses) have complained loudly that these moves would ruin their global competitiveness by raising input costs. And in a supposedly devastating irony, they insist that these higher prices would offset much of the impact of the new tax cuts championed by the President.

If only looking broadly at recent changes in business costs justified such concerns. Or even came close. In fact, the big picture shows that domestic U.S. businesses – including steel users and companies that rely on parts and components from China in particular – have received benefits that will dwarf the costs created by tariffs. These higher costs, moreover, should be all the more acceptable given that a tariff-centered approach is the only response to longstanding predatory foreign economic practices like government-subsidized overcapacity and officially enabled intellectual property theft – whose gravity is now (finally) widely recognized – that hasn’t already failed.

To take one typical example, the Tax Foundation, a think tank that’s called the new Tax Cuts and Jobs Act “once-in-a-generation pro-growth tax reform,” thinks the following finding decimates the case against the proposed U.S. China tariffs: They’ll “offset more than a quarter of the tax cuts for 2018.” But by definition, for business, some three-quarters of the benefits of generational tax policy improvement will remain in place. (The exact share is unclear because the Tax Foundation includes consumer costs in its figure for overall tariff increase costs, but it’s no doubt roughly comparable.) In return, at least potentially, major threats to the global trading system will be eliminated or at least reduced significantly. This is an unacceptable trade-off?

And tax cuts are hardly the only major helping hand business has received from the Trump administration. According to one major supporter, the editorial page staff of Investor’s Business Daily (IBD), the regulatory cuts and changes accomplished so far by the President amount to a “Yuuuge” promise kept. Citing a (sympatico) Heritage Foundation study, the publication specified that the net gains for business far exceeded the alleged dollar amount of relief anticipated from the first phase of the new regulatory reform program – $645 million.

For the Trump accession to the White House meant that American companies would no longer be contending with an Obama administration that imposed $120 billion in regulatory costs on the nation’s economy each year, and wouldn’t need to worry about a Democratic successor presumably likely to continue down this road. That’s quite a turnaround.

And the true scale of the reversal is far greater still, for according to Heritage, “the impacts [of the Obama policies] have not been fully quantified for a significant number of rules, and…many of the worst effects — the loss of freedom and opportunity — are incalculable.” In sum, according to another analyst quoted by IBD, the Trump administration’s approach is “one of the most significant developments in regulatory policy in decades.”

Finally, it’s not as if U.S.-based businesses have been hurting financially lately. Corporate profits are near all-time highs as a share of the total economy. So are manufacturers’ profits.

And revealingly, American manufacturing’s productivity growth has been lousy lately, signaling that these firms have enormous potential to absorb the higher input costs generated by tariffs by achieving greater efficiencies.

Not that there may not be numerous convincing arguments against the Trump administration’s imposed and potential tariffs. But can American business, and its enablers in the nation’s chattering classes, at least stop pretending that devastating cost hits to their operations represent one of them?