American stock markets have skyrocketed since the election of Donald Trump. The president-elect and giddy investors think they're on the cusp of Reagan 2.0. But, Ruchir Sharma writes, they can't go back to 1981:
The forces that underlie economic growth have weakened significantly since the Reagan years, worldwide. No nation, no matter how exceptional, can try to grow faster than economic forces allow without the risk of provoking a volatile boom-bust cycle.
The potential growth rate of an economy is roughly determined — and limited — by the sum of two factors: population and productivity. An economy can grow steadily only by adding more workers, or by increasing output per worker. During the Reagan years, both population and productivity were growing at around 1.7 percent a year, so the potential United States growth rate was close to 3.5 percent. In short, Reagan did not push the nation’s economic engine to run faster than it could handle.
In recent years, America’s population and productivity growth have fallen to around .75 percent each, generously measured, so potential economic growth is roughly 1.5 percent, less than half the rate of the Reagan era. Any policy package that aims to push an economy beyond its potential could easily backfire — in the form of higher deficits and inflation.
Like all conservatives these days, the Republicans want to turn back the clock:
The nub of the problem here is nostalgia for a bygone era. The postwar world grew accustomed to the rapid growth made possible by the baby boom. Not every country with rapid population growth enjoyed a steady economic boom, but few economies boomed without it. And for most countries, the era of population growth is now over.The pressure of falling population growth means that every class of countries needs to adopt a new math of economic success, and bring its definition of strong growth down by a full point or more. For developed nations like the United States, with average incomes over $25,000, any rate above 1.5 percent should be seen as relatively good.
As they have done before, the Republicans will sabotage the economy -- and try to blame it on somebody else.