Wayne O'Leary

Trump’s Goldilocks Economy

Until early February’s jarring investor speed bump, which suddenly took the stock market down as fast as it had lately been rising, Donald Trump and the Republicans were sitting pretty on the backs of the bulls. It had been an exhilarating ride through the first of the year, featuring record high upon record high as consecutive barriers for the Dow Jones industrial average were broken for the first time — 24,000 on Nov. 30, 25,000 on Dec. 28, 26,000 on Jan. 17.

By the time the indexes peaked on Jan. 26, the Dow (26,617) had risen 45% and the Standard & Poor’s 500 (2,873) 27% since the Trump inauguration a year earlier. Over the course of 2017, the Dow gained 25% in value, the S&P 19%, and the technology-laden Nasdaq composite index 28%. It seemed the “Trump bump” was a real phenomenon, proof of the Donald’s golden touch. Of that, the president had no doubt. “The reason our stock market is so successful,” he told reporters in November, “is because of me.”

Others on the conservative right concurred and extrapolated from the upward trajectory of the market under Trump to the economy in general. In the eyes of R. Glenn Hubbard, dean of the Columbia Business School and former economic advisor to George W. Bush, the Donald was an unsurpassed “cheerleader for optimism.” And economist Stephen Moore, senior fellow at the Heritage Foundation, rhapsodized (a bit prematurely) about Trump’s stewardship in a January New York Times op-ed: “One year into his presidency, could the economy be any rosier? … few presidents can claim to have presided over the kind of economy the United States is enjoying now.”

The clear-skies economy Moore glowingly described is often referred to as a “Goldilocks economy” — not hot enough to cause inflation and not cold enough to cause a recession, but (in the words of the fairy tale) just right. From the economist’s point of view, it’s an optimal state of affairs characterized by growth, stability, and lack of volatility, but one always at the mercy of capitalism’s vagaries.

To Republican partisans, Trump’s perceived Goldilocks economy is a natural outgrowth of correct conservative policies, and the corporate world enthusiastically agrees. Make no mistake, Donald Trump has become the personification of a revived, post-recession global capitalism, a leaner, meaner reincarnation of the collapsed pre-2008 economic system.

His reception at the World Economic Forum in Davos, Switzerland, last month made that readily apparent. CEOs from over a dozen multinational firms (Siemens, Nokia, Nestle, Bayer and Anheuser-Busch among them) feted the prodigal president and heaped praise on him for showing the way with his tax-cutting and regulatory rollback. Happy days, they think, are here again.

Nevertheless, back home, the celebration is on hold pending a rebound on Wall Street, which some doubt will happen. First, a reality check: The stock-market upsurge Donald Trump is so proud of (or was until recently) is not of his making; it’s a continuation of the bull market initiated in March 2009 and kept going ever since by cheap labor costs and the Federal Reserve’s low-interest policies (now moderating) that together produced high corporate earnings. Like other bull markets, most famously 1924-29, it carries the seeds of its own destruction (overvalued stocks) within it and will eventually collapse of its own weight.

Furthermore, the stock market is not the real economy, but a glorified gambling casino built on wishful thinking, overweening “confidence,” and the expectation of future riches, propelled in this case by messianic exhortations from a president who, like Calvin Coolidge in the boosterish 1920s, talks up the market constantly (From Jan. 25 of this year: “Looks like another great day for the Stock Market.”).

The contrast between Trump’s beloved market and the everyday economy is stark. Last year, as stocks roared into record territory — the Dow rose 5,000 points in all — GDP growth remained a tepid 2.3%, and hourly wages crept up an unimpressive 2.5%. That’s not exceptional; the Dow averaged 15% annual growth from 2009 to 2013, while the GDP and wages averaged all of 2% per year.

If the swollen stock market has been doing little for most Americans, it’s been doing quite a bit for one group. According to the executive data firm Equilar, CEOs for S&P 500 companies enjoyed an 8.5% median increase in compensation from salaries, bonuses, and stock options in 2016, roughly triple overall wage growth. That trend is expected to accelerate with the implementation of the Republican tax cut, which will boost the profitability of large US firms (upon which their stock values are based) an estimated 7 to 10 percent in 2018. Meanwhile, American workers’ real wages, which Donald Trump asserts are “going way up,” are pegged by the UK’s Trades Union Congress (using OECD data) to grow only 1.2% this year.

This disparity will only be exacerbated by the new “territorial” system of multinational corporate taxation slipped into the GOP tax law by Speaker Paul Ryan. In the future, once their estimated $2.6 trillion held in overseas tax havens is repatriated at a fire-sale discount rate of 15%, American multinationals will be assessed a mere 21% (the official new corporate-tax rate) on subsequent domestic earnings and even less (10.5%) on overseas earnings, which form the bulk of their revenues; further, they will receive an 80% credit on any tax payments to foreign governments. The upshot: a massive incentive to invest overseas, ship more jobs abroad, and reduce US domestic wages.

Corporate good fortunes are premised, of course, on continued boom times, and a number of economic experts who predicted the 2008 financial crisis, including Yale economist Robert Shiller of Irrational Exuberance fame, have raised red flags. Ominously, they see speculative bubbles developing; that is, asset prices rising far above their underlying values — in this instance, for technology stocks, housing, government bonds, and market shares generally, which investment counselor Peter Schiff (Euro Pacific Capital) calls the “mother of all bubbles.”

When something pricks those bubbles in coming months — rising interest rates, higher inflation, a pullback of China’s central bank from its debt-servicing purchases of US Treasury bonds — a day of reckoning will be at hand. Then, Goldilocks Trump will be seen scampering through the forest, with the three bears, and many others besides, in hot pursuit.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, March 15, 2018

Populist.com