Economic Growing Pains 2017

"The simple message is the economy is doing well," Federal Reserve Board Chair Janet Yellen said in the press conference that followed the central bank’s third quarter-point rate hike in 15 months. She went on to say "We have confidence in the robustness of the economy and its resilience to shocks." You might be wondering what exactly “well” means. Let’s start with the long-term economic growth rate, which has averaged about three percent annually for the 50 years from 1966 through 2016.

The post-recession years, from June 2009 through the end of last year, have seen a lower growth rate of just over two percent per year. And in their economic projections released last week, Fed officials expect in GDP growth to remain at around two percent per year for the next three years. That below-trend growth may change as a result of fiscal policies like tax reform and infrastructure spending, but as Yellen noted, until details emerge, it is still too early to know how these policies would unfold and “We have plenty of time to see what happens.”

Economists and analysts are more upbeat than the Fed, primarily because they are betting on at least some economic boost from fiscal policy. According to the Wall Street Journal’s monthly survey of economists, “forecasters expect 2.4 percent growth in 2017, compared with 2.2 percent prior to the election” and in 2018, they expect 2.5 percent. “But after 2018, the economists expect growth to slow back down to 2.1 percent, primarily due to the waning impact of the not-yet-enacted fiscal measures.”

Are the economy’s current growing pains a sign that we have permanently downshifted or are we simply still feeling the after-effects of the Great Recession? The answer lies in two areas: the growth of the work force and the productivity of those workers. The work force is important because as it grows, the economy can produce more. Prior to the Great Recession, the labor force grew at about one per cent a year, but it is now expanding at a slower pace and is expected to increase by about 0.5 percent in the near term. Part of the slow down is demographic—millions of baby boomers are retiring, but the other problem is that productivity of the existing workforce has also slowed, to about half the level that we saw during the nineties.

Before getting too discouraged, the answer may be simpler, according to Claudio Borio, Head of the BIS Monetary and Economic Department. He recently delivered a wonky speech and said “There is plenty of evidence that banking crises, which occur during financial busts, cause long-lasting damage to the economy…there is also evidence that recoveries are slower and more protracted.”

As the administration and Congressional Republicans roll out various fiscal policy initiatives, from American Health Care Act, to the Trump Budget Blueprint, to what is likely to be a big overhaul of the US tax system, it is important to recognize that the government can play a role in accelerating growth, but Brio notes that it usually requires “a rare mix of what Antonio Gramsci once called ‘pessimism of the intellect and optimism of the will’: pessimism to assess the challenges ruthlessly, and optimism to overcome them.” In other words, we need lawmakers to work together in order to address the big challenges that lie ahead. 


The news cycle has prompted many of you to write in with a number of questions about terms that you read and hear about in the news...

Q: What is the big deal about the Alternative Minimum Tax (AMT)?

A: After a few pages of President Trump’s 2005 tax return was recently revealed, there was a lot of freaking out about AMT, which the President paid in that tax year. Here’s the deal: AMT was created in 1969 to ensure that wealthy taxpayers pay at least some minimum amount of federal income tax, regardless of deductions, credits or exemptions. In essence, it is a flat tax with two brackets, 26 percent and 28 percent. Originally intended to prevent perceived abuses by a handful of the very rich, it now affects almost 5 million filers.

Q: What are discretionary budget items?

A: When President Trump unveiled his Budget Blueprint for fiscal year 2018, I fielded a bunch of questions about terminology. Just like your own budget, there are items that are discretionary (dining out, entertainment) and non-discretionary – or mandatory, like a mortgage payment. Federal budgets also use those terms, though there are other implications.

Discretionary spending, which includes most defense, education, and transportation programs, is determined through the congressional appropriations process. Mandatory spending is governed by law and includes entitlement programs, like Social Security, Medicare, and Medicaid; and for many smaller programs, including unemployment compensation, retirement programs for federal employees, student loans, and deposit insurance. About 60 percent of all federal spending is considered mandatory.

Q: What’s the difference between the debt and the deficit?

A: The deficit is a simple annual calculation—it’s the money government takes in minus the money government spends. According to the Congressional Budget Office (CBO), the deficit for fiscal year 2017 is $559 billion or about 3 percent of GDP.

The national debt equals the total amount borrowed to fund the annual deficit and it currently stands at $20 trillion. The national debt is divided into debt held by the public ($14.4 trillion) and debt that the government essentially owes itself ($5.5 trillion).

CBO projects that over the next decade, “if current laws remained generally unchanged, budget deficits would eventually follow an upward trajectory—the result of strong growth in spending for retirement and health care programs targeted to older people [Social Security and Medicare] and rising interest payments on the government’s debt.”