You are here


Will a big bust follow the current US big boom?

WRITING in The Wall Street Journal, Princeton economist Alan Blinder calls it "The Obama-Trump Economic Boom". This may be the best bad label for what may soon become the longest economic expansion in American history as Mr Blinder's turn of phrase has the virtue of spreading the glory among two candidates.

It is not, of course, that presidents do not wish to influence the economy. Whether they help or hurt, they are sure to claim paternity for good economic news. Donald Trump is no exception. He congratulates himself for the strong stock market (up US$7.7 trillion since his election victory on Nov 8, 2016, reports Wilshire Associates) and solid job creation (about 200,000 payroll jobs per month over his first two years).

Just how much praise Mr Trump deserves for this performance is unclear. When reviewing the figures above, remember that in the last two years of the Obama presidency, the economy also generated 200,000 jobs per month.

As for the stock market, it rose US$18.8 trillion from its low point in 2009 to Mr Trump's election, according to Wilshire. Given the different time spans, the comparison is inexact, but it emphasises that the stock surge preceded Mr Trump's election.

Market voices on:

More to the point, Mr Obama delivered to Mr Trump an economy that had overcome the worst psychological effects of the financial crisis and the accompanying Great Recession. This was not inevitable. In the dark days of late 2008 and early 2009, the talk of another Great Depression was not entirely fanciful. The responses of the Federal Reserve under chairman Ben Bernanke and the Treasury Department under secretary Timothy Geithner contributed significantly to the turnaround.

The case for Mr Trump rests on his refusal to respect the conventional wisdom that the economy's annual growth rate is now limited to a modest 2 per cent, far lower than the post-World War II average of about 3 per cent. He ploughed ahead with a sizable tax cut of US$1.5 trillion over a decade. I (and many others) opposed this as risking higher inflation and needlessly expanding already-large federal deficits. But it gave the economy an extra shove that bolstered confidence and growth. Sure enough, the economy grew about 3 per cent in 2018.

To all these factors must be added surprising developments that do not fit in any purely partisan framework. Chief among these has been low inflation, which has remained at about 2 per cent annually - identical with the Fed's target. Why inflation has been so subdued is a mystery.

Economic textbooks warn that, as an economy approaches "full employment", wages and prices will accelerate. Companies will increase wages to attract and keep workers; bottlenecks and shortages will raise prices. So far, this has not happened.

In theory, full employment is the lowest unemployment rate consistent with stable inflation. If the unemployment rate dips below this level, wages and prices will accelerate. Customary full employment estimates are unemployment rates in the 4-5 per cent range. But suppose the rate is 3.5 per cent or 3 per cent, reflecting an older work force that values job security more than younger workers. (In January, the unemployment rate was 4 per cent.) The trouble is that full employment can only be surmised by inflation's behaviour. It is guesswork.

Regardless, low inflation has kept interest rates down, and low interest rates have kept stock prices up. That is another development beyond the control of presidents.

The current economic expansion began in mid-2009, and has already passed the 1960s' boom for longevity (106 months, from 1961 to 1969). It is now approaching the record of the 1990s' boom (120 months, from 1991-2001). Princeton's Mr Blinder cites these threats to the expansion: a trade war with China and others; a stock market crash; an unexpected jump in oil prices to US$90-100 a barrel (it is now trading in the mid-US$50s); a collapse of consumer or business confidence.

Realistically, Mr Blinder doubts that any of these will soon derail the recovery. "My bet is that the current expansion will sail through June, setting a new record," he wrote. The biggest threat, he argued, is a long shot - a constitutional crisis involving Mr Trump that destabilises the economy.

There is, however, one overlooked danger: The two long expansions of the post-World War II era - the 1960s and the 1990s booms - were both followed by tumultuous crises and subpar performance. After the 1960s boom, the economy succumbed to rising inflation, which peaked at about 13 per cent and demoralised millions of Americans. The 1990s tech boom ultimately led to the devastating 2007-09 financial crisis and Great Recession.

It is almost as if there is an unwritten law requiring that the big booms be succeeded by big busts. With luck, maybe history will not repeat itself. THE WASHINGTON POST WRITERS GROUP