Via Mohamed El-Erian for FT
As we near the six-month mark of Donald Trump’s presidency, the US economy continues to create lots of jobs but is yet to unleash its full economic potential. It is an evolving economic record that points to the opportunities and challenges facing the administration.
The good: growth focus
President Trump’s economic narrative has focused the debate on the importance of increasing economic growth to 3-4 per cent annually, and of ensuring that the benefits accrue to many more segments of the population. To this end, the administration has identified three economic pro-growth policy priorities: tax reform, deregulation, and infrastructure.
Also consistent with the growth objective, Mr Trump has stepped back from the protectionist threats advanced during the election campaign. There has been no dismantling of the Nafta trade agreement, no crippling tariffs on China and no cancellation of bilateral trade agreements.
As a consequence, measures of household and corporate sentiment, including consumer confidence, have surged concurrent with the multiyear improvement in balance sheets. A Bloomberg national poll published this week shows that 58 per cent of American surveyed feel they are getting closer to meeting their “career and financial aspirations”, a level that this poll started in February 2013 has registered just once before.
Yet all this remains to be reflected in “hard” data and Mr Trump’s ambitious growth objectives remain elusive. The less positive aspects of the record explain why.
The bad: implementation delays
While policy design has been progressing despite staffing issues, implementation has lagged behind, with the exception of deregulation. The administration will miss its initial August deadline for tax reform. and the infrastructure plans are incomplete. This amplifies the challenges Mr Trump faces in securing rapid congressional passage.
Design complexity is certainly an issue, especially for a tax regime that, unreformed since the mid-1980s, is riddled with distortions. Important pro-growth tax reform elements, on which many politicians from both parties are likely to agree, are obfuscated by overly ambitious plans for upfront cuts in tax rates, especially for the better-off who have already significantly increased their share of national income, wealth and economic opportunities.
The infrastructure component — itself subject to tricky design issues, including the appropriate role for public-private partnerships — will falter unless (and until) there is consensus on key budget parameters, including the extent to which the deficit may be increased without raising debt sustainability concerns.
The administration has not helped the situation by putting the even more complex and divisive issue of healthcare before Congress ahead of important economic matters. Add to that Russia-related distractions and the economy faces the risk of completing its first year without passing key economic legislation.
Also, the policy trio (tax reform, deregulation and infrastructure) constitutes only foundation stones for the comprehensive policy effort needed to generate a high and sustainable rise in more inclusive economic growth. It needs to be supplemented by further efforts to enhance productivity, including improving the functioning of current and future labour forces through better education, skill acquisition, retooling and retraining.
The ugly: global policy co-ordination
The recent growth pick-up in China, Europe and Japan improves the global context for the US economy. But secular sustainability is in question. Moreover, as illustrated by this month’s G20 summit in Germany, global policy co-ordination falls far short of what is needed to address the growing list of shared problems and strained inter-connectiveness.
Part of this problem relates to the erosion of America’s global standing, credibility and leadership role — a point that Jamie Dimon, JPMorgan’s chief executive, highlighted during the company’s conference call last Friday. The longer this situation persists, the greater the fragmentation pressures on the global economy, including the emergence of regional orders that may ultimately be detrimental to the US economy.
Six months is, of course, too short a time to reach a definitive judgment on any administration’s economic record. But it has been instructive in highlighting the potential of the economy and the challenges it faces. This balance risks being tipped unfavourably should Congress and the administration fail not just to reach timely agreement on tax reform and infrastructure, but also subsequently to build quickly on the pro-growth foundation.