Six years and ten. Over the last 60 years or so, the U.S. economy has been in the sweet spot for periods touching about six years. A sweet spot is a period in which we are at or near full employment, wages are rising, inflation is low and stable, and interest rates are low. It’s taken almost a decade to reach this point. This is a rare moment. Enjoy it, and don’t screw it up.
Not only is the U.S. economy growing steadily, but growth has accelerated. President Trump released President Obama’s regulatory brake and so the economy sped up in 2017 as predicted, but by more than even most optimists would have ventured. The economy is now poised to accelerate further in 2018 and to maintain a strong pace in the years to follow thanks to tax reform. Nancy Pelosi’s crumbs are about to turn into a great big celebration cake. Meanwhile, inflation continues to sleep like a baby.
It gets better, because the acceleration in the U.S. economy is occurring even as the global economy enjoys a very rare synchronized expansion. Europe is doing very nicely overall. China and India and most of the Pacific basin are motoring forward. Even Russia and Brazil are growing.
In the past, these sweet spots have not been brief due to bad luck, but bad policy. Sometimes the bad policy was enacted years before and the consequences took time to build, but more often the bad policy immediately preceded a recession.
The good news is the economy faces few risks of a near-term recession-inducing policy failure. Longer-term such risks abound, such as the Federal government’s unsustainable fiscal policy and rising debt even as tax burdens remain near their historical norms. Related are the Federal government’s major entitlement programs which are scheduled to go belly up in just over a decade.
More near term, while the Federal Reserve’s path for 2018 is well-established and sound, the Fed is still removing stimulus. This poses no immediate threat to the economy, but what comes thereafter? These are issues for 2019 and beyond.
The U.S. economy faces one real policy threat in 2018, and that’s a trade war. A trade war not only risks massive disruptions to global supply chains, it also risks spoiling the special sauce now ensuring robust growth – strong business and consumer confidence. By every measure, confidence in the economy today is at or near all-time highs. This confidence is especially important for business investment which is the key driver of faster growth from tax reform. Deflate this confidence with a trade war and a marked slowdown in the economy is sure to follow.
While serious problems persist in the global steel market, President Trump’s steel and aluminum tariffs were a blunt and misaimed response. Simply put, steel from Europe is not the problem. When there’s a problem, fix the problem. Don’t throw the baby out with the bath water. As the Chinese themselves acknowledge, when it comes to steel, the problem centers on Chinese overcapacity.
Trade issues with China have lingered for many years and go well beyond steel. The Obama administration’s response was in this regard immaculately consistent – turn a blind eye to Chinese misbehavior with respect to dumping and intellectual property theft and much more. Not surprisingly, President Trump intends a different approach, and will have a significant opportunity to respond under U.S. trade law when in the coming weeks the United States Trade Representative releases his Section 301 report on Chinese trade practices.
So the good news is the administration is focusing more on the problem, but it still appears to lack a prudent and effective solution. As U.S. Chamber President Tom Donohue observed, “The administration is right to focus on the negative economic impact of China’s industrial policies and unfair trade practices, but the U.S. Chamber would strongly disagree with a decision to impose sweeping tariffs.
“Simply put, tariffs are damaging taxes on American consumers. Tariffs of $30 billion a year would wipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform. If the tariffs reach $60 billion, which has been rumored, the impact would be even more devastating.
An old saw runs that the most expensive deterrent weapon costs far less than the cheapest war. To be sure, China cannot be allowed to inflict the U.S. economy with the consequences of its own misguided industrial policies, nor can it be allowed to continue unfair trade practices. The issue now is the smart approach and constructive solutions, solutions that protect American businesses and workers without risking a trade war that could upend the U.S. expansion just as it’s finally found the sweet spot.
China and the United States have to learn to live together, and finding a trade modus vivendi is a good place to start. This sweet spot for American families should not be brought to a premature conclusion by a trade war.