The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

The Economic Outlook for the Election and Beyond, and How Who Wins Could Change It

September 7, 2016

With nine weeks to go, the economic conditions for the election are set — modest growth, low inflation, and continuing job gains. A few Wall Street forecasters rate the odds of a 2016 recession at one-in-three; but unless a major shock wrenches the economy off its present course, bet with Janet Yellen and Ben Bernanke on the economic expansion continuing into next year.

The tougher question is what economic conditions will confront the new president and the rest of us in 2017 and 2018? Since the fourth quarter of 2015, the economy has grown at an annual rate of less than one percent, and business investment has declined at a three percent annual pace.

Consumer spending and home sales could lift growth and investment next year, if the healthy income growth of the last three years continues. But much of those income gains come from the unusually strong job growth of those years; and with unemployment now below five percent, job creation almost certainly will moderate soon.

If jobs gains lessen next year, healthy income gains will depend on a turnaround in the economy’s disappointing productivity record. A modern economy cannot stay strong indefinitely without strong productivity growth to fuel incomes, demand, profits, and investment. Its recent record explains our slow growth: Productivity gains averaged just .6 percent per year from 2011 to 2015, and even those small gains turned negative in the first half of 2016.

This represents a major change: Productivity increased at an average rate of 2.8 percent per year through Bill Clinton’s second term and remained strong at 2.6 percent per year from 2001 to the financial collapse in 2008. Moreover, it recovered quickly in 2009 and 2010, reaching 3.2 percent per year. Unless productivity recovers again in 2017, wages and incomes could stall and the economy could stagnate in the next President’s first or second year in office.

Yet, the economic debate this year has mainly focused on overall growth rather than productivity. Most economists — Ben Bernanke, Paul Krugman, Larry Summers and Kenneth Rogoff, among others — pin the slowdown in GDP growth on higher savings and the associated weaker spending. So, most economists have called for renewed fiscal stimulus here and for much of the world. They’re right; but the outlook for incomes and investment would be more encouraging if the fiscal stimulus focuses on recent meager, or even negative, productivity gains — and their impact on growth.

Americans are in luck — assuming the pollsters are right that Hillary Rodham Clinton will vanquish Donald Trump. While Clinton has not offered an explicit program to boost productivity, her economic and social policy proposals include the three essential elements of such a program. First, improve overall market conditions for all industries; second, promote innovation through the development and broad use of new technologies, materials, and ways of doing business; and third, give workers access to the skills they need to operate effectively in a more innovative economy.

The big play to improve the efficiency of all U.S. industries and businesses is Clinton’s commitment to expand public investments in infrastructure by $275 billion over five years. Unsurprisingly for Hillary, her program covers every conceivable form of infrastructure. There are new investments not only for roads, bridges, public transit, rail freight, airports, seaports, waterways, dams, and wastewater systems.

Her proposals also cover 21st century infrastructure networks, including a smart electric grid, advanced oil and gas pipeline systems, and universal access to 5G broadband and Next Generation wireless. Since virtually every enterprise and employee depends on these systems every day, her proposals should enable most firms and workers to carry out their business more efficiently.

As stimulus, these infrastructure improvements amount to $55 billion per year, or just three-tenths of one percent of GDP. Fortunately, Clinton’s program includes other measures that also should bolster productivity. To promote innovation, she pledges to scale up federal investments in basic research and development through the NSF, the NIH, the Energy Department and DARPA, across areas from high performance computing and green energy, to machine learning and genomics.

Always a pragmatist, Clinton also has plans to promote the commercialization of advances in R&D through grants for private accelerators and reforms to expand access to capital by the young businesses that play a prominent role in innovation.

Finally, Clinton has a serious program to help Americans upgrade their skills. Computer science training would be available for all high school students, and foreign-born students who complete a U.S. masters or Ph.D. degree in a STEM field would automatically receive green cards to stay and work in the United States.

However, the cornerstone is tuition-free access to public colleges and universities for all young people from families earning $125,000 or less, and tuition-free access to community colleges for anyone. To complete her productivity agenda, Clinton should expand her community college program and give all working adults the real ability to improve their skills, through no-cost access to two training courses per year at community colleges.

From the other side, Trump offers virtually nothing. He says that he, too, would increase federal spending on infrastructure. But his tax promises would balloon federal deficits by upwards of $700 billion per year, leaving no room to upgrade infrastructure, much less promote basic R&D or expand access to higher education and worker training.

His massive deficits also would crowd out business investments in new technologies and new enterprises. Trump’s program, in short, would virtually guarantee that the American economy stagnates, or worse.



Administration Out on a Limb for GM — and for the Rest of Us

April 28, 2009

As Churchill famously said of democracy, the administration’s new plans for General Motors are a dismal idea, except for all of the alternatives. Under the plan, GM has to come up with a detailed strategy by June 1 that plausibly will allow it to survive and so receive nearly $12 billion more from the taxpayers, or file for bankruptcy. By then, the government will have lent GM $27 billion. What’s new in the plan is that the Treasury will swap half of that debt for equity (GM shares). In the end, the government and a healthcare trust managed by the United Auto Workers will hold 89 percent of the auto giant. Unsecured bondholders will own the rest, if they agree to swap their debt for equity too — and even as they complain bitterly, they’ll have little choice, since if they don’t go along, GM goes belly-up and they get nothing.

With the clarity that comes from impending doom, GM is finally taking serious steps to restructure itself — something it could have done a decade ago and avoided all this. Toppled last year by Toyota as the world’s Number One automaker, the former Detroit titan is now headed for much leaner territory. In exchange for the government’s billions and the UAW concessions that have kept it afloat for the past six months, GM has already announced plans to close down Pontiac — Saturn and Hummer will follow soon — shutter nearly 30 percent of its plants and, by the end of 2010, reduce its workforce by one-third and pare its dealership network from 6,200 to 3,600. If all of this works, GM will end up the Number Three automaker operating here and Number Four or Five in the world.

Already weak before the financial crisis and recession hit, GM probably could have stumbled through a normal business downturn without much help. But like a number of other national brands, GM found that it couldn’t survive a protracted financial-market freeze that dried up its credit line and a deep recession that decimated its sales. The risk now is not that GM managers won’t be able to come up with more reasonable plans, especially with their countless advisors from investment banks, consulting firms and the President’s auto task force. Rather, the risk here is that GM won’t be able to produce competitive automobiles that will sell and keep the company in business into 2010 — and the government can’t do anything about GM’s capacity to turn out sellable cars. I suppose that’s the good news here: Larry Summers, Tim Geithner, and Steven Rattner won’t try to tell GM how to run itself. Instead, once they approve GM new plans, we all become passive investors, much like the big pension funds that hold large stakes in hundreds of other companies.

The government also doesn’t know much about running, for example, either an airline or a retail chain, two other industries with huge market leaders near bankruptcy. So, why hadn’t it offered to lend billions to United Airlines or the GAP, and then swap those loans for majority equity positions? What the easy critics of the plan don’t see is that GM is part of a much larger and deeper global network of suppliers and distributors, so like Lehman Brothers and Bear Stearns — and Citigroup and AIG — its sudden failure would have cascading effects. On top of that, there’s the deep recession — and it’s still getting worse, not better — which could dangerously aggravate those cascading effects. In short, an abrupt bankruptcy by one of America’s largest and most iconic companies during the worst recession in 80 years could drive down the economy another big notch, making all of the current problems that much harder to solve.

So, if it costs the Treasury another $12 billion to try to head that off — or another $20 billion down the line — it will be worth it if it protects the rest of us from an even more dismal economy. Now, think about it: If the Bush administration had done that with Bear Stearns more than a year ago and then Lehman Brothers, all of these problems would be a lot more manageable.