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July 31, 2018

CNN: Gee, Maybe Trump Deserves Some Credit For This Strong Economy

CNN is now less hostile to the president than NeverTrump.

From Sexton's write-up, but quoting CNN.

President Donald Trump thinks he's overdue some credit for steering the strongest economy on the planet -- and he's probably right...

Often, the President's hyperbolic assessment of his own performance is at odds with the facts. But Friday’s announcement that the economy grew at a 4.1% pace in the second quarter, the best showing since 2014, is genuine cause for celebration.

It may also be his best chance to argue that a huge and controversial tax cut, the only really significant legislation he has managed to pass, is -- as he said it would - -unleashing prosperity...

Unemployment is lower than it has been for decades, corporate earnings are strong and it seems unlikely that a sudden crisis is looming that could derail things before Americans head to the polls in midterm elections that will have a huge bearing on Trump's presidency.

Sexton himself notes CNN's previous headline:

Back in 2016, CNN even ran a story with this headline: "Trump promises 4% growth. Economists say no way."

There's a little apples-to-oranges here, because CNN was downplaying the possibility of 4%+ yearly growth, while Trump's 4.1% is just a quarterly reading. It's relatively common to have a mere quarter of 4%+ growth -- as the media has informed us ceaselessly, even Obama managed that trick a few times in his 32 quarters of presidentin'.

We'll see if Trump can actually unleash a 4% year.

But even 3% yearly growth would be a huge change in what has become the New Normal of 2-2.3% yearly growth. The Wall Street Journal welcomes the new era of 3% growth, and says, basically, "My goodness, how we've missed you."

So much for "secular stagnation." You remember that notion, made fashionable by economist Larry Summers and picked up by the press corps to explain why the U.S. economy couldn't rise above the 2.2% doldrums of the Obama years. Well, with Friday's report of 4.1% growth in the second quarter, the U.S. economy has now averaged 3.1% growth for the last six months and 2.8% for the last 12.

"Secular" in economics terms means "long term" and "built deep into the structure of economic fundamentals" and is contrasted with both short-term and "cyclical."

Talking about "secular stagnation" is talking about a near-permanent reduction of expectations, growth, and wealth.

The lesson is that policies matter and so does the tone set by political leaders. For eight years Barack Obama told Americans that inequality was a bigger problem than slow economic growth, that stagnant wages were the fault of the rich, and that government through regulation and politically directed credit could create prosperity. The result was slow growth, and secular stagnation was the intellectual attempt to explain that policy failure.

The policy mix changed with Donald Trump's election and a Republican Congress to turn it into law. Deregulation and tax reform were the first-year priorities that have liberated risk-taking and investment, spurring a revival in business confidence and growth to give the long expansion a second wind.

The nearby chart shows GDP growth by quarter over the last four years. The numbers show that the long, weak expansion that began in mid-2009 had flagged to below 2% growth in the last half of 2015 and in 2016. Nonresidential fixed investment in particular had slumped to an average quarterly increase of merely 0.6% in those final two years of the Obama Presidency. An economic expansion that was already long in the tooth began to fade and could have slid into recession with a negative shock.

The Paul Ryan-Donald Trump growth agenda was targeted to revive that investment weakness. Deregulation signaled to business that arbitrary enforcement and compliance costs wouldn't be imposed on ideological whim. Tax reform broke the bottleneck on capital mobility and investment from the highest corporate tax rate in the developed world. Above all, the political message from Washington after eight years is that faster growth is possible and investment to turn a profit is encouraged.

The chart and the second-quarter GDP report show that this policy mix is working. Growth popped to a higher plane of nearly 3% in the middle of 2017 as business and consumer confidence increased with the Trump Administration's policies taking center stage. A growth dip in the last quarter of 2017 on tax-reform uncertainties carried over to the start of the first quarter, but growth has since accelerated.


Most intriguing is that the government's annual revisions to long-term GDP on Friday showed a sharp increase in the personal savings rate. The increase was due to an upward revision in wages and salaries and jumped to 6.7% from 3.4% for 2017 and averaged 7% in the first half of this year. That's about $500 billion more in the pockets of Americans than previously estimated and helps to explain why consumer spending has remained strong. With tight labor markets, consumer spending should keep contributing to growth.

The rest of the article cautions Trump against his bluster about possible tariff wars over what he calls "unfair trade," without seeming to realize that the higher wages caused by the "tight labor market" are at least partly due to keeping more jobs in America.

Will Trump actually achieve 4% growth? Well for the current year, the forecast had been for 3%, revised down to around 2.8% due to concerns about the "trade wars" that have not actually materialized yet in any large way. We'll see if that number is revised back up if these fears subside, and the unchallenged assumption that that free trade is an unambiguous good for a nation even if its trade partners are not offering free trade in return gets a little challenging.

But yeah, 4% is probably possible. Not likely, but possible. No one saw Reagan's 5.5% yearly growth years coming. In fact they similarly claimed such things were impossible.*

4% growth would be, after 16 straight years of anemic growth and non-growth, a stratospheric level for the economy. Reaching the stratosphere requires an upward trajectory, first of all. That's not all you need to reach high altitudes, but it is an indispensible starting requirement.

Well, we have that now. Thanks, Trump!

* Most people make Straight Line Projections from the now into the future. They imagine the future will be just like now, except with different dates.

Forecasters do not like deviating from that straight line projection, except to add a peak or valley here or there to show their analysis is not solely a straight-line projection.

But I've had a theory for some time -- not really proven or even tested; just an observation and wild-ass guess -- that the straight-line projection method of forecasting the future is almost always guaranteed to be wildly wrong. You don't know how things will change, whether we'll have a big upside or a big catastrophe, but I sense that the odds of these latter two possibilities, Big Good Change and Big Bad Change taken together, are orders of magnitude** more likely than the conservative Straight Line Projection forecast.

The Straight Line Projection feels the "safest" to forecasters because it's a mix of good and bad, and because, by predicting no major changes, they seem Responsible and Sober.

However, safe though this prediction might be for one's reputation, it is wrong more often than it is right.

It reminds me of the idea that any particle exists in a blend of all possible quantum states. The straight line projection is kind of like that blend of all possible future states.

But like the superposition of quantum states, they do not remain in that blended state of all bad and good possibilities. The moment a quantum state is measured -- or, in my analogy, the moment the future actually arrives -- the quantum superposition collapses into an unambiguous and binary Up or Down position.

We do not remain in the blended state of all possible futures forever. Only until the future actually arrives.

** Well, I overstated. Not orders of magnitude more likely. But more likely.

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posted by Ace of Spades at 04:52 PM

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