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Wednesday, May 23, 2018

ANALYSIS/OPINION:

Thomas the Doubter must have been an economist.

Those dismal scientists mostly greeted Donald Trump’s ascent skeptically and some with horror — remember Paul Krugman predicting the apocalypse. And now look at how most assess his time in office.


Faced by an economy clipping along at nearly 3 percent growth, they are gravitating en masse to a false prophecy — 70 percent of private-sector economists predict a recession beginning as soon as 2020. The new gospel — as proselytized by the Congressional Budget Office (CBO) — is that the economy is getting a temporary jolt from tax cuts and increased government spending, but it will then tail off next year.

What the species ignoramus denies is lowering corporate tax rates boosts private investment and that happens with a lag. In this case, after so many years of denying payouts to shareholders, thanks to tax laws that forced any responsible CEO to park profits offshore and punitive personal tax rates that made boosting dividends unattractive, corporations are paying their debts. Businesses are finally rewarding shareholder patience by boosting dividends and buying back more shares.

It seems CBO economists read The New York Times instead of the professional literature.

Nonpartisan research predating the Trump candidacy indicates the 15 percent cut in taxes on business profits enabled by corporate reforms should increase investment between 7.5 percent and 15 percent. And in the current environment of deregulation, the higher figure should more closely apply.

Look for all that to boost growth in 2019 if something else bad does not happen.

In the near term, little danger is apparent from overheating. Unemployment may be down to 3.9 percent, but wages are not taking off. Simply, a good number of healthy recruits remain available among those who became discouraged during the Obama years, a stronger dollar is keeping competitive imports inexpensive, and robotics and artificial intelligence are kicking in.

Headline inflation is piercing the Federal Reserve’s 2 percent threshold but that is largely because oil prices were depressed from 2015 to 2017. Bouncing gas prices have lifted headline consumer prices, but the trend in the core — prices less food and energy — has been decidedly downward since January.

Consumers generally take a breather during the winter months, because the financial crisis taught them caution. Households have a good time shopping for the holidays and then pay down their bills in the first quarter — hence the tax cut only recently lifted retail sales.

Fed Chairman Jerome Powell, unlike most professional economists, does not let what personal feelings he has toward politicians cloud his thinking. If the numbers continue to show core inflation subdued, he will recognize the Fed can do little but wreak havoc by boosting interest rates too quickly or too much.

An intemperate surge in rates could be devastating internationally. The Europeans, whose statism most professional economists worship, have failed to clean up their banks. The Brits are the exception but on the continent, Germany’s largest bank, Deutsche Bank, is still run badly and in Italy, medieval practices die hard.

The dollar has become even more dominant globally, compelling businesses and governments to borrow greenbacks instead of local currency. Overly aggressive Fed tightening could create crises for many of those debtors — look at Argentina’s recent begging at the door of the International Monetary Fund.

As for a trade war, economists can’t get over the fact that free trade did not work out for the vast swath of interior America, because the Chinese hardly play by free-trade rules.

A poorly conceived American response to China’s aggressive mercantilism could be devastating, but doing nothing would be even worse. Look at the corrosive consequences of trade-driven unemployment, social decay and opioid addiction in America’s rural communities and small cities.

The trick is to penalize China in ways that make retaliation difficult — and that can be done. If I have reservations about President Trump, it is that his trade team listens to few outsiders because they are too busy arguing among themselves.

Administrations that don’t listen are nothing new. Barack Obama was in constant broadcast mode, and his economists could never be accused of open minds.

There is a resiliency about America when the government gets out of the way. Bank on that.

History has been very unkind to those that short sell the United States of America — credentialed experts included.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.


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