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.
Image: OpEdNews
10 comments:
There will probably be plenty of growth for the rich. How far can neo-liberal economics be pushed before people realize that it is just legalized corruption on a massive scale?
Good point, Toby. It's not just about growth. It's about how the growth is shared.
How can we expect infinite growth on a finite planet, especially as energy gets more costly?
Precisely, Hugh. There are limits to growth. We may get to sustainability. But unlimited growth is a myth.
Ruchir Sharma is the head of the emerging markets desk at Morgan Stanley and brings a Wall Street perspective to analyzing America's economy. Unfortunately it's a truncated A+B = C formula model that assumes all other influencing forces are externalities. I'm sure it's a useful model for some short range investment purposes but economic issues, especially political economy, is about much more than investment.
It's hard to argue with his conclusion that America isn't going back to the Reagan era or at least the image of the Reagan era many Americans continue to embrace. Yet Sharma's black and white formula ignores, for example, that, when Carter left office, America was the world's largest creditor nation and, when 8 years later Reagan left office, America had become the world's largest debtor nation. A good deal of that Reagan era growth was a function of foreign borrowings infused into the US economy.
America's economy remains propped up by its offshore creditors. They have financed, in totality, the cost of America's luxury expenditures - foreign wars and tax cuts for the rich - and the willingness of America's creditors to continue to accept the US dollar as the world's reserve currency.
Then again, America has been adding more workers, oodles of them, only they're not Americans. From Nike to Apple, the workforce has expanded offshore in China and throughout Asia Pacific. Productivity is doing well too at least when output is measured against Third World wages. This, of course, benefits Joe Lunchpail not at all except when he has to take his stagnated wage packet to WalMart to buy the only goods he can afford, the products with "Made in China" stamped on the box.
As you probably realize by now, I find Sharma's analysis right in conclusion but facile in foundation.
You provide context that is missing from the op-ed, Mound. As Toby points out, it's not just about growth, but how the growth is distributed. Sharma has nothing to say about that. But, as he points out, if the Trumpistas believe they are going to return to the days of their hero -- Mr. Reagan -- they're smoking something funny.
95% of Wall*Marts merchandise is produced in China.
The well being of the North America economy factors in the Wall * Mart effect in that their cheap( not inexpensive) products subsidise low wages and benefits.
Without the Wall* Mart effect the lower end consumer, of which there are millions, is going to be decimated by Trump imposing hefty import taxes.
TB
Trump has never been a lower end consumer, T.B. His business model isn't built around them. In short, he doesn't know how they live; and he doesn't care to find out how they live. His ignorance makes him their own worst enemy.
I am still hoping against hope Trump is some kind of wack job Mr Smith. He has correctly called BS on the whole free trade lie. Now lets see how he fixes it. It helps that China and some US states have wage parity.
Given his history, Steve, my hunch is that you're going to be disappointed.
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