US Economy Still Leading the World

A better than expected second quarter US GDP economic growth estimate issued by the Commerce Department last week has helped to calm concerns about the negative effects of the continuing US trade war with China, and led to growing optimism that the Federal Reserve would announce an interest rate cut of at least a quarter percent this week to further stimulate the economy. The 2.1% second quarter growth rate was considerably stronger than the 1.8% rate that a consensus of US economists had expected. It was mostly due to the optimism of the US consumer, whose spending increased during the April to June period at an impressive 4.3% rate.

The bright outlook for the continued growth of the American economy is based upon strong consumer spending, near all-time low unemployment rates, large wage increases for minority and undereducated workers, a reduced government regulatory burden on businesses and continued stimulus from last year’s corporate and personal tax cuts.

The current recovery is now the longest on record. In June, the economy celebrated the 10th anniversary of the end of the Great Recession. During Obama’s presidency, the benefits of the relatively sluggish recovery were unevenly distributed, with most of the income gains going to the richest households.

After Trump took office, the rate of economic growth accelerated significantly, as did new job creation. Sharply reduced corporate tax rates and regulation reductions boosted business activity, generating historically low unemployment rates that increased the competition among employers to attract and retain their workers. This has led to large pay increases that are boosting the standard of living for many minority families and enabling them to start catching up after decades of flat wage rates for those on the lowest income levels of the American economy.

NUMBERS BACK UP TRUMP’S ECONOMIC BOASTS

President Donald Trump claims credit for the current success of the US economy. Last week, he boasted on Twitter that the economy was “the best in our country’s history” with the “best employment and stock market numbers ever” and that he has led the United States to the “greatest economic boom in the history of our country.”

Liberal economists are quick to point out the economy’s ongoing problems such as a sluggish housing market, in part due to the fact that many young families cannot afford a down payment because they are still burdened with repaying their student loans. But while rejecting his hyperbole, many of Trump’s critics do concede that he has largely delivered on his campaign promise to restore American prosperity, which could be a decisive advantage for his bid for re-election next year.

There are also statistics that back up Trump’s bold claims:

June was the 16th consecutive month with the unemployment rate under 4%. More people are employed now than at any time in our nation’s history. The number of people unemployed today is under six million for the first time in 18 years.

For the past 16 consecutive months, there have been more job openings than unemployed people to fill them, with the current surplus standing at 1.4 million more job openings.

Average workers’ wages are up 3.4% over the past year, which means that someone earning the average hourly wage while working 40 hours per week has received a $1,500 annual raise.

Trump’s economic success story is clearly a problem for Democrat presidential candidates running against him on a socialist-inspired agenda, based upon voter discontent with economic inequality, and calling for forced government income redistribution, growth-killing tax increases and an attack on private enterprise.

DEMOCRATS GOING RADICAL

In previous presidential election cycles, liberal Democrats used to include reassurance to voters that they were not trying to replace America’s free-market economic system, but rather just trying to “improve” it by making sure that everyone gets their fair share of its benefits. But that tactic has been largely abandoned by most current Democrat presidential candidates who are mimicking the socialist policies which Senator Bernie Sanders introduced to the American political mainstream in his 2016 presidential campaign. Those proposals, now adopted by many Democrats, openly brand American capitalism as inherently evil.

They are telling the American people that the only way to fix the economy is by destroying the capitalist entities — such as health insurance companies, the pharmaceutical industry and oil companies — and replacing them with more benign, politically correct and environmentally friendly government-run agencies.

Trump insists that such radical changes are not necessary, and that his record as president proves that free-market-based policies do work. He seeks to bring renewed prosperity to the endangered American middle class and raise the standard of living for the poorest in American society by enlarging the overall size of America’s economic “pie.” Trump rejects the Democrats’ approach, which abandons any hope for growing the pie and focuses instead on redistributing the current pieces, and calls it “socialism.”

WHY DEMOCRATS PREDICT ECONOMIC DOOM

Progressive Democrats insist, despite the official economic numbers to the contrary, that Donald Trump’s policies have failed middle class Americans and minority workers, and that their benefits are enjoyed almost entirely by only the very rich.

In an essay published last week, entitled “The Coming Economic Crash and How to Stop It,” presidential candidate Senator Elizabeth Warren wrote that, “Whether it’s this year or next year, the odds of another economic downturn are high, and growing. . .

“I see a manufacturing sector in recession. I see a precarious economy that is built on debt, both household debt and corporate debt, and that is vulnerable to shocks. And I see a number of serious shocks on the horizon that could cause our economy’s shaky foundation to crumble.” Her formula for heading off the imminent economic crisis is to quickly pass new regulations on the financial sector and to grant forgiveness to $600 billion in student loan debt, paid for by a new 2% levy she has proposed on all people with a net worth of more than $50 million. Warren’s financing proposal is interesting, because it is not a traditional tax on income or spending. It amounts to a partial government confiscation of a person’s wealth, based upon the socialist denial of the concept of private ownership of capital.

The young head of the Democrats’ progressive faction, Congresswoman Alexandria Ocasio-Cortez, denies the significance of record-low unemployment rates under Trump. She says that “unemployment is low because everyone has two jobs. Unemployment is low because people are working 60, 70, 80 hours a week and can barely feed their family.”

One of Trump’s most prominent critics in the entertainment industry, Bill Maher, said last year, after the economy began picking up following the passage of Trump’s tax cut bill, that “the bottom has to fall out at some point. And by the way, I’m hoping for it. Because I think one way you get rid of Trump is a crashing economy. So, please, bring on the recession.”

Maher was criticized by some Democrats at the time for saying that publicly, but it does reveal the extent of the determination of many liberals to get rid of Trump, even at the cost of a recession which would bring real economic hardship for tens of millions of American families.

If one of the progressive candidates does win the 2020 Democrat presidential nomination, next year’s election campaign is likely to turn on the clash between these two very different approaches to economic policy.

US DOING BETTER THAN EUROPE AND CHINA

The continued vitality of the American economy contrasts sharply with the grim reality of falling growth rates in France and Germany, forcing European central banks to consider further lowering interest rates that are already in negative territory to ward off growing fears of a recession. The European picture is further complicated by political instability in Great Britain, Germany and France, and growing societal tensions arising from a huge influx of unassimilated non-European immigrants.

Meanwhile, the trade war with the US is having a serious impact on China’s economy, particularly its manufacturing sector. A Reuters poll of 34 economists found that Chinese factory activity in July fell for the third consecutive month. Measures taken so far by the Chinese government to compensate for the US tariffs have not stemmed the slowing of the rate of growth of China’s economy, which reached a 27-year low in the second quarter, with many global companies confirming that they are reducing their reliance on Chinese supply chains and manufacturing in an effort to evade the recently increased US tariffs.

US talks with China to end the trade war broke down in May, when President Trump accused the Chinese of going back on some of the concessions to which they had previously agreed. Meanwhile, the punitive 25% US tariff on $250 billion of imports from China remains in effect, as do retaliatory Chinese tariffs on US goods, reducing the overall volume of global trade. However, Trump did suspend another round of announced tariff increases on Chinese imports in the hope that a resumption of the trade talks in Shanghai this week might lead to rapid completion of the almost finished deal.

The unresolved points in the dispute include US demands that China fully open its internal markets to fair competition from foreign companies, end requirements that foreign businesses share their proprietary technology with a Chinese partner company, halt widespread bootlegging of American products and strengthen protections for intellectual property.

DAMAGE FROM THE TRADE WAR AND HIGH INTEREST RATES

The US-China trade dispute has led to a general slowdown in international trade and a reduction of the growth of other foreign economies, especially in Europe.

Continued uncertainty about the future of US-China trade prompted many US business leaders to suspend their new spending plans for second quarter 2019, which led to a 5.5% reduction in business investment for the period, compared to the first quarter, when prospects were brighter that a trade deal with China would soon be reached.

Another factor reducing GDP growth was the Federal Reserve’s decision to raise interest rates twice in the second half of 2018, which increased the costs to banks of making credit available for businesses, impeding economic growth. President Trump harshly criticized Federal Reserve Chairman Jerome Powell for the last two interest rate hikes, which resulted in a steep decline in the economic markets. Powell ultimately abandoned his policy of automatically raising interest rates according to a fixed schedule, and promised to be more sensitive to the current signals from the markets which are interpreted as calling for rates to be reduced.

Economic observers believe that Powell now recognizes that the Fed’s last two increases were a mistake, and that he is ready to reverse them either with one half-point rate reduction or two quarter-point reductions, starting this week.

Stephen Moore, one of Trump’s favorite conservative economists, told Fox News that he believes that the underlying US economic growth rate is actually 3.1%, the same as it was in the first quarter. He believes that in the second quarter, tariffs due to the trade dispute with China cost the economy a half-point in growth, and that the higher than necessary interest rates imposed by the Fed cost the economy another half-point, resulting in the final second quarter GDP growth number being 2.1%, a full point lower than it should have been.

Even if a deal to end the trade war with China remains out of reach, for the time being, America’s export economy is bound to improve once Congress ratifies the new trade deal that Trump has negotiated with Canada and Mexico to replace the flawed NAFTA agreement. While ratification of the treaty would require bipartisan support in Congress, the measure is endorsed by major labor unions, which means that House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer will probably urge its passage.

Investment specialist Ken Fisher, writing in USA Today, believes that the current recovery still has a long life ahead of it, and that the third quarter of this year will set new records. He notes that “Economic cycles don’t die of old age. . . Expansions die from multitrillion-dollar negative shocks. Historically, central banks, like our Federal Reserve, were often the culprit. They have often misread the tea leaves, feared an inflationary overheated reality and tightened evermore while the economy weakened.”

Fisher says that as an investor, he prefers the current relatively slow rate of growth, because it is unlikely to foster the investor euphoria that often leads to market crashes.

TWO-YEAR BUDGET DEAL PROVIDES STABILITY

Another development pointing to uninterrupted growth was the passage by the House last week of a compromise two-year federal spending plan which is expected to be signed into law before the House and Senate adjourn for their summer vacation next week. The deal boosts government domestic and defense spending, suspends the federal debt ceiling, eliminates the remaining “sequester” automatic spending caps called for by a 2011 budget bill, and prevents another disruptive partial federal government shutdown until July 2021, at the earliest.

A 35-day partial federal government shutdown, starting in December, combined with severe winter weather nationwide, slowed growth substantially earlier this year, but the stronger than expected second quarter statistics have bolstered confidence in the current recovery.

The bill would increase defense spending to $738 billion and $740 billion over the next two fiscal years, compared to the current level of $716 billion. This would enable the Pentagon to continue the program which was launched at the start of Trump’s presidency to modernize its weapons and improve combat readiness.

Other domestic spending would rise to $632 billion and $634.5 billion over the next two years, compared to this year’s $605 billion.

Conservative budget hawks complained about the bill’s increase in spending, which will result in continued trillion-dollar annual federal budget deficits for at least the next two years, and a net increase of $1.7 trillion in the deficit over the next decade. White House and Republican leaders responded by asserting that the realities of a divided legislature, with Democrats in control of the House, made it necessary to agree to liberal demands for increased spending in return for the assurance of government stability through next year’s election.

House Minority Whip Steve Scalise admitted that he, too, was not entirely satisfied with bill that he urged other Republicans to support. “You know, any time you have a big budget deal … it’s tough rounding up votes for it, because everybody can find something they don’t like,” he told reporters. Other House Republican leaders, including House Minority Leader Kevin McCarthy, Republican Conference Chairwoman Liz Cheney and Rep. Guy Reschenthaler, were also among the 65 Republicans who voted for the bill, while a sizable majority of GOP members of the House, including House Freedom Caucus Chairman Mark Meadows, voted against it.

House Speaker Nancy Pelosi was largely successful in keeping Democrats together in support of the measure, but it was opposed by 16 progressives who objected to the increase in defense spending.

The bill passed the House by a vote of 284-149, and is expected to be voted upon and passed by the Senate next week. Senate Majority Leader Mitch McConnell said of the bill, “Considering the circumstances of divided government, this is a good deal.”

UNREALISTIC SPENDING PROPOSALS

The spending increases in the bill pale in comparison to the huge new spending programs being proposed by progressive Democrats and their leading contenders for the 2020 presidential nomination. These include $30 trillion over the next decade for “Medicare for All,” $90 trillion for the “Green New Deal,” and many trillions more to wipe out student loans and offer a free college education to every American.

When asked how they would pay for this additional spending, Democrats blithely call for increases in tax rates on the wealthy and American businesses, which would instantly reverse the economic stimulus from Trump’s tax cuts and regulation reductions over the past two years.

In fact, even a sharp increase in federal taxes on the middle class would not generate nearly enough money to pay for all the new Democrat spending programs. Their passage would inevitably lead to massive increases in budget deficits, with disastrous long-term consequences for the American economy.