It might at first seem to be a strange paradox. The stock market has reached a new and rocking high. Hiring seems to be on pace. Unemployment is low. New hirings are up. Corporate earnings are solid. New technologies are coming at us so hard – startup capital has dramatically shifted to the ICO market – hardly anyone can keep up. Economic growth itself is still far too slow but in every other way, economic performance is not shabby.
Donald Trump likes to take the credit. The phrase “Trump Bump” still has resonance.
Does he deserve it? This seems implausible. No serious legislation or executive orders have been issued that affect factors that make for economic growth. Taxes haven’t been cut, health insurance markets are still a mess (so much for repealing Obamacare), regulatory liberalizations have been limited to only a couple of sectors, and his continued dabblings with protectionist legislation are genuinely alarming.
On top of all this, Washington is consumed in nonstop drama with huge White House staffing changes, the Russian investigation, leaks and counter-leaks dominating the news, and partisan hatreds at a high. If there were a relationship between stability in government and economic growth, surely all this DC chaos would be super bearish for economic growth and stock valuations.
Instead we are seeing the opposite. The sector dominated by government, and the sector dominated by economic factors, are pulling in opposite directions.
What’s going on here?
“None of the soap opera in Washington matters,” Frank Sullivan, chief executive of RPM International in Cleveland, Ohio, told the New York Times. “Nobody in business cares about who talked to who in Russia.”
What Does Not Matter
This is true enough. Whether and to what extent Trump had connections to Russia, what he told the Mexican president, whether and why his son-in-law had this or that meeting, and all the rest of the daily prattle in the press, matters not at all for what drives the business economy in this country. And it is the commercial life in this nation that ultimately matters for the most fundamental aspects of our lives.
Maybe the truth is even weirder. What if the silliness and drama of Washington politics, distracting everyone in the Beltway with insider nonsense, is actually a bullish sign for the economy?
I’m reminded of the origin of the phrase laissez-faire. Louis XIV’s finance minister Jean-Baptiste Colbert supposedly asked a merchant what the government could do to promote business. The response was: leave us alone and let goods flow. Washington, for all the grotesqueries we see in Congress and the executive branch, is mercifully not making things worse.
Yay, the End of Nonstop Misery
In some ways, this is a step in the right direction, and something of a change from the regulation-happy Obama administration.
Thinking back to the end of the Obama years, bureaucracies tried to shove through a mighty panoply of terrible controls, among which the overtime rules that would have recategorized hundreds of thousands of workers. Businesses all over the country were retooling their labor forces. Then, suddenly, a Texas judge intervened and said no. The election occurred, Hillary lost, and the proposed regulatory change evaporated in a puff of smoke.
And on the tax front, it’s true that there are no tax cuts on the horizon (and that’s a tragedy) but at least it is pretty clear that the Trump administration is not going to support higher taxes. That is merciful relief.
As for healthcare, the ACA is a terrible thing but the worst of it has already been factored in as a deadweight loss on economic life. Business has swallowed the costs, and it is not likely to get worse in a way that fundamentally affects corporate profitability.
One hates to downgrade expectations for government this much, but it is perhaps true that the most bullish sign for the American economy today is that regulatory intervention is not likely to get that much worse as quickly as it might have if Trump were not elected.
The Power of Markets
And that’s all that the commercial and financial sector really needs to grow: a belief that interventionist calamity is not on the horizon. That is enough to keep the markets humming. And think about it: that’s an amazing tribute to the power of entrepreneurship, commercial life, and the market economy generally. All it needs is for the boot on the neck not to be pushed down too hard too quickly.
A tragic feature of a booming financial sector is that this does not necessarily translate into better economic lives for the middle class, or especially for young workers with no ownership stake in financials. Too many are still locked out. Changing this will surely require that policymakers do something right for a change. (It is also possible that the seeming prosperity of our time is illusory, a consequence of loose credit, high government spending, and wild debt proliferation, just as many pessimists claim.)
Now consider this in light of what might have happened if there really were fundamental reform on heathcare, taxes, and regulations? Let’s just say that there really were dramatic cuts in the capital gains tax, the corporate tax, the income tax, the payroll tax and so on. And let’s say that labor regulations were not just slowed but really cut, to the point that employers really had more flexibility and workers really were in a position to expand hiring, and then they could actually retain more profits for more investment.
Let’s say there were just tiny, marginal improvements in these several areas. Can you imagine what kind of economic growth we would see? No, we cannot use a model to discover precisely how much, simply because economic action is too complex a matter of human choice. But experience here suggests that life could be very good, even great.
If all it has taken is a slight reduction in the pace at which the burden of government gets worse, it overwhelms you to realize just how good we could have it, if we only took the right steps.