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The Economics of 2018

Irwin M. Stelzer

“Mournful, dazed, sullen, traumatized, self-absorbed, defensive, remote, morbid, bleak, bummed-out, alienated, unprotected, besieged.” That’s how a leading pop music critic describes the music of choice of “millennial and younger listeners . . . making their way into an era of accelerating income inequality . . . with staggering debt . . . [and] the prospect of working in dead-end . . . job[s].” Due, it seems, in good part to the election of Donald Trump.

As forecasts go, this one by Jon Pareles, chief popular music critic of the New York Times, can be counted as somewhat partisan. It is consistent with polls showing that 70 percent of Americans believe the country is on the wrong track, but inconsistent with people’s behavior: They have dipped into their wallets and swiped their credit cards to bring cheer to retailers this shopping season, and home buying is at record levels, a sign of confidence in the future.

It is certainly more colorfully put than the equally partisan forecast being emitted by the White House. Two graduates of Goldman Sachs, now employed by the president, see nothing but clear sailing into a bright future for America. Gary Cohn, director of the National Economic Council believes, or says he does, that because of the tax cuts “We’re easily going to see 4 percent growth next year.” And Treasury secretary Steve Mnuchin believes, or says he does, that accelerated economic growth will generate enough tax revenue to wipe out the $1.5 trillion in added debt that most experts say will be created by the corporate and other tax cuts that the president predicts will “pour rocket fuel into the engine of our economy.” It is that projection that eased the consciences of Republicans who have spent their political careers opposing any increase in the national debt. They could support the tax cuts, argue they will pay for themselves in added revenue, and sleep soundly between campaign appearances.

No surprise that Democrats, most of whom supported President Obama’s deficit spending on the ground—you guessed it—that deficits pay for themselves, have donned the feathers of the hawks and are moaning about the economic mayhem that the $1.5 trillion added to the nation’s stack of IOUs will cause.

The fact is that we are launched on a sea of doubt, a great experiment in economic policymaking so important to the political futures of its advocates and opponents that we had best look elsewhere for reasoned guesses as to the result of these tax cuts. The investment bank at which Cohn and Mnuchin were trained, or at least at which they worked for several years, is neither as pessimistic as music critic Pareles, nor as giddy over the prospects for 2018 as its alumni—not to mention our hyperbolic president. It is guessing (oops, forecasting) that the economy will grow in the new year at an annual rate of 2.6 percent. Which includes 0.3 percent from the tax cuts. Morgan Stanley agrees that the tax reductions will add 0.3 percent to growth, but puts the overall growth rate next year at only 2.1 percent. Alec Phillips, Goldman’s chief U.S. political economist, expects growth in 2019 to be a meagre 1.8 percent, and perhaps turn negative in 2020.

These seers are forced by their job descriptions to estimate how consumers will react to an increase in take- home pay, how corporations will react to the increase in after-tax profits (and to new more generous write-off provisions), and how international companies will react to the opportunity to bring home profits at a special lower rate. And much more. So permit their use of the professions’ escape clause “all other things being equal”—which they never are.

These analysts must also guess at whether an almost entirely new Federal Reserve Board monetary policy committee will follow the policies laid down during the soon-ending term of chair Janet Yellen, or veer off in another direction, especially if Trump’s rocket fuel propels inflation rather than growth.

By the time he leaves office, the president will have appointed all 7 of the Fed governors who serve on the 12-member monetary policy committee. Jay Powell, who replaces Yellen on February 1, has generally supported her policies. But if economic circumstances change, he will be drawing on his experience as an investment banker, rather than on the analytical tools of economist Yellen. It is not certain that he will come up with the same answers she would have. In fact, it is probably the president’s hope that Powell will be slower to trigger anti-inflationary, growth-slowing increases in interest rates than would any trained economist. Whether Trump, always reluctant to interfere in the workings of independent agencies, wrung such a promise from Powell we will never know.

But we do know that another Trump nominee, academic economist Marvin Goodfriend, would have been less likely to support the policy of mortgage purchases—quantitative easing in the jargon of the trade—and more likely to resort to negative interest rates than was Yellen. And that Randal Quarles, appointed as vice chair in charge of financial supervision, was picked because he is likely to ease the regulatory burdens imposed on banks after they were bailed out by taxpayers during the Great Recession.

In short, we have two known-unknowns: the course of the economy once the tax cuts bite and the course of monetary policy to be set by a new Magnificent Seven of Fed policymakers. There are also unknown-unknowns that can set forecasters scrambling to amend their predictions, the famous “events, dear boy, events” that worried Harold Macmillan. These always exist, but in the age of a volatile and erratic Donald Trump their occurrence must be considered more, rather than less, likely. Best to keep in mind the warning of estimable columnist Ross Douthat, “All punditry is provisional.”

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