The new mainstream wisdom is that increased public spending, specifically on infrastructure, can restore strong economic growth and overcome what has come to be called “secular stagnation”—the slow growth of the economy since the Great Financial Crisis of 2007–2009. This is the conclusion drawn by everyone from Bernie Sanders to Larry Summers to President Donald J. Trump and his chief White House political strategist, Steve Bannon.
During his campaign, Trump proposed a combination of tax cuts and infrastructure spending, deficits be damned, which made him more of a Keynesian than Hillary Clinton, who stayed within the framework of “fiscal responsibility” that was the mantra of her donors. (Whether the specific proposals in this Trump stimulus program would actually result in the promised increases in total spending is another question.) A great many statements from economists and central bankers have backed this return to fiscal activism in principle. A recent paper by Jason Furman, chair of the Council of Economic Advisers for President Obama, chronicles the shift in mainstream opinion, away from the faddish view that fiscal policy can do nothing for growth, and toward a view—perhaps no less faddish—that only fiscal policy can work.
One might take this as a hopeful sign. A bipartisan quasi-alliance favors a large-scale public investment program. No one speaks seriously any more of inflation. We seem far from the Phillips Curve of the 1960s, the stagflation of the late 1970s, the do-nothing consensus of the 1980s, or the Social Security scares of the 1990s. And for the new administration, the stakes are high. Having started his term on a chaotic note, the president needs to deliver on his economic program, which promised a sustained increase in the rate of growth to at least 3 or even 4 percent, along with a resurgence of jobs and manufacturing production. So the question is: can he do it?
There is no dispute that better infrastructure would be a good thing, even though the benefits do not flow mainly to industry as many suppose. The value of better infrastructure is largely in an improved quality of life, through better roads and trains, cleaner water, reliable electricity, and so forth. Industry tends to take care of its own needs and so public infrastructure, largely, benefits the public. Partly for that reason, as I’ve recently argued elsewhere,* infrastructure alone can make little difference, in the face of higher interest rates and a strong dollar, for the manufacturing sector. But it will probably be a boon for land prices, and hence for developers and real-estate investors, and so economic growth may follow, even if it concentrates substantially on construction.
In the short run, it is possible that the Federal Reserve may preempt and derail the Trump growth program (at least for a time) by raising interest rates too much, before the fiscal program can have an effect. That is what happened to the Reagan economic program in 1981, leading to recession and sharp Republican losses in the 1982 mid-term elections, before the tax cuts and spending increases took hold. Trump lacks Reagan’s early standing, and his government might not survive an unexpected downturn. But even if the Federal Reserve cooperates, is it possible from where we stand today to reignite the flames of postwar economic growth? The answer to that is, probably yes, for a time; big deficits are good for growth. The question is how long growth of this sort can be sustained.
My answer is a cautious “not very long.” But not (as some argue) because the United States will run out of credit. Rather, obstacles exist on what economists call the “supply side” of the spectrum. They are demographic, technical, institutional, and material. These are Institutionalist themes, and to some extent they evoke the concerns of those Depression-era American economists who played prominent roles in the structural reforms of the New Deal, and who worried, in some cases, that the boom years of the war would be followed by a return to stagnation when the war ended. Those concerns were not borne out. Since that time, they have been disregarded equally by anti-Keynesians, who argue that the economy always self-corrects, and by today’s vulgar Keynesians, who believe that all problems with the economic engine can be solved by adding fuel. The Institutionalists argue that mechanical problems do exist today—whatever was true seventy years ago—and some of them have no easy policy cure.
My pessimism is cautious, rather than definitive, because some of the supply-side factors operate at the global level; they will affect the United States only if the world economy also grows. But others are national, and will affect prospects for growth early on.
The first problem is demographic: the U.S. population growth rate is down and Americans are aging out of the work force. A 1950s growth rate requires either more working people or a much higher rate of productivity growth, which infrastructure investments do not necessarily provide. To bring in new workers via immigration is, one suspects, not on the Trump agenda.
Historically, productivity growth can be induced, via the pressure of an acute labor shortage and rising wages. But if a labor shortage and rising wages were to occur, we may also anticipate a harsh reaction from the hardliners at the Federal Reserve, whose numbers will likely be reinforced under Trump. So in the most likely scenario, any labor shortage would induce not faster productivity growth, but higher interest rates, an inverted yield curve, and an economic slowdown. To make things turn out otherwise would require a different political breed at the Federal Reserve and an old-fashioned controller’s approach to profits and pricing pressures.
Technology throws up a second obstacle to high growth. This is an odd, and almost paradoxical problem. It has to do with the way things are measured, especially in areas strongly affected by the digital revolution, which for several decades now has been the dominant form of technological change. As many economists have noticed, technological innovation is accompanied by slow rates of measured productivity growth, and therefore slower rates of economic growth as we measure it. Mainstream economists have long been baffled by this. How can we at once be experiencing vast technological transformations, visible to all, and yet not be experiencing an increase in productivity?
But perhaps it’s not such a puzzle. The key lies in understanding what has happened to the character and quality of investment goods, to the equipment and facilities businesses acquire or build in order to run their operations. For most of the two centuries since the Industrial Revolution, business investment was mainly in manufacturing, and therefore in buildings and in machines. These are costly, and their production requires labor, which means it generates a substantial quantity of jobs and incomes. Economists from Marx through Keynes and beyond treated the “investment-goods sector” as that part of the economy that governed total employment, profits, and the business cycle.
But today we live in a world where the price of investment goods—after adjustment for quality—has fallen a great deal. This is because the new electronic business capital is, by comparison with the bricks, mortar, and steel of past eras, very cheap. Meanwhile, the proportion of investment goods imported has risen, and imports are a deduction from growth. Today when a business makes a new investment, it normally means purchasing some new tech product from Japan or Germany, and the dollar invested is offset by the dollar of imports. In that case, the net effect on measured output (GDP) may well be very small, if not nearly zero. So the share of investment in total output has fallen, and the effect of investment on growth has also fallen.
The difficulty is that domestic output and domestic incomes are the same, and without an increase in dollar flows, new investment of this type brings little increase in household incomes or in jobs. The problem for us, therefore, is not the artifact of low measured productivity growth; it is the actual fact of lost jobs, of underemployment, and a population short of the services it needs or of the money to pay for them.
There is nothing in Trump’s stimulus program that addresses this issue; nor could there be, given the general confusion that surrounds it. But it will affect the performance of the Trump program—especially his tax cuts for business investment—in two major ways. First, it will add to the difficulty of actually sustaining a measured growth rate of 3 or 4 percent, even if businesses do increase the pace of their investments. Second, it will leave an unexpectedly large share of the population without work, since a major purpose of the new technologies is to save labor. This means that the working-age population to which Trump appealed is unlikely to get the new jobs he promised.
Third, there are the banks. In the postwar period, 1945 to 1980, commercial bank and home mortgage lending played a substantial, but not predominant, role in financing economic growth. Public spending and a growing non-profit sector financed the activity that banks did not. But in the past generation, government has shrunk and its contribution to new employment and incomes has been small. So banks ended up financing a much larger share of the growth that occurred, and they did this in waves: the housing loans that led to the savings and loan crisis in the 1980s, the information-technology boom that led to the NASDAQ crash in 2000, and the fraudulent mortgage-finance craze that led to the Great Financial Crisis in 2007. Each of these waves ended, inevitably, in a slump; the final one in a crash.
But with the financial crisis, the banking system basically broke down. The failure to reconstruct it, root and branch, to serve a public purpose has to count as the greatest policy—and political—failure of the Democrats under Barack Obama. The Dodd-Frank Act, while useful on certain points, left an oligarchy of vast and unaccountable power intact, in a lending climate marked simultaneously by excessive caution, with respect to the social investments and job-creating businesses that the country needs, and unchecked recklessness, with respect to short-term profit opportunities (such as fracking) and areas where government programs and bankruptcy laws create conditions for exploitation (such as home foreclosures and student debt). The Trump program for the banks plainly aims to make the problems of concentrated power and unchecked recklessness worse.
As things stand, the financial sector neither serves a public purpose nor does it deliver the growth it once did, until it broke down nine years ago. While there are people who feel obliged to borrow, and there will always be new generations of suckers, boom-and-bust banking credit isn’t a viable model for growth any more.
What should be done about the banks? These are institutions with high fixed costs and with technologies and transnational legal structures that are designed to facilitate tax evasion and regulatory arbitrage. They face very limited prospects for sustained profitability in activities that correspond to social need. Their entire structure isn’t viable in a world of slow growth, except by fostering short-lived booms (of which the shale rush was the most recent example), followed by busts and bailouts. In short, the financial sector as a whole is a luxury we cannot afford. But under Trump, the banks will be again unleashed, with the Volcker Rule, the Consumer Finance Protection Bureau, and other modest reforms up for reversal. The result may well be a short-lived burst of activity followed by an irreparable bust. That is, if the bust doesn’t happen first.
The final problem is global, and it is the problem of resources. The United States passed peak conventional oil back in 1970; and the world now faces the same peak, with a time-limited (but uncertain) reprieve in the form of oil and natural gas from shale formations. Growth requires energy, and the actual cost, not to mention the colossal environmental costs, are rising. Coal is a dubious alternative and anyway not an efficient transportation fuel. The old-fashioned strategy of pillaging foreign lands is on the minds of some, but recent military misadventures have proven that this too has a high price. Combat zones yield little oil, because oil companies sensibly prefer not to put their equipment, their people, or their permanent installations in the line of fire.
Still, for the moment and through the early Trump years, energy as such is likely to remain relatively abundant. The greater risk stems from the financialization of energy markets if global demand grows stronger. Such conditions generate a “choke-chain effect”—that is, speculators will have the power to choke off growth by withholding inventory and running up energy prices. This already happened once, in the summer of 2008, when oil hit $147 per barrel, draining purchasing power just before the crash.
One way forward would be to ramp up the harvest of solar power, taking advantage of a rapidly falling cost curve. Solar is indefinitely sustainable. But for this to help with global warming, we must also forego coal and oil options and accept a diversion of resources away from consumption and toward the investments in renewable energy that are required. In this case, growth and the material living standards we can support under sustainable energy will be lower, and this will be experienced by the population as less (immediate) prosperity than they would have otherwise had. This option, which could forestall the choke-chain effect, will be rejected by the Trump team.
In sum: demography, technology, the financial structure and eventually, energy markets and climate change all place limits on the effectiveness of a stimulus program. Demography and a crackdown on migration will limit the workforce. Modern technology limits the effect of new business investment on measured growth. And the dysfunction of the financial sector limits the multiplier effect and the stability of any expansion. Finally, the energy scenario is unpredictable, but the choke-chain effect could bring induced shocks to energy prices in the best case, while climate change threatens ultimate unsustainability in the worst.
If there is secular stagnation today, it is a product of the world in which we actually live, which is more unstable, perilous, and uncertain than it used to be, and certainly far more so than in the golden years that followed the Second World War or even in the fools’ paradise that lasted from Reagan through Clinton. But we are where we are. There is no easy cure, and this fact has radical implications for how society should be organized and how economic policy should be designed.
From this point of view, the Trump strategy—insofar as one exists—amounts to little more than a firm determination to drive an old car, at high speed, into a wall. Perhaps the only way things might work out is if the effect of tighter money falls first on the rest of the world, giving the United States access to cheap fuel, food, materials, and consumer products, in a return to the high-dollar, high-trade deficit, worldwide debt crisis of the mid-1980s. Or if protection could effectively spur American business to counteract the rise of the dollar and invest anyway in the domestic market. To the extent that the Trump team understands the global context, this may be their plan.
But will the rest of the world comply? Reagan had the advantage of a vast commercial debt crisis that cut world commodity prices, fatally weakening the Soviet Union, while China was not yet a player on the world stage. There was therefore growth without inflation, in defiance of the mainstream wisdom of that day, and no need to risk a trade war. Can Trump repeat this achievement? It is true that Latin America, after fifteen years of growth and social progress, is already back in the economic and political dumps. But today China, India, and also Russia—despite its dependence on oil exports—are stronger economies than they were back then, and Japan, despite virtually disappearing from the headlines, remains a first-rank industrial power. Will they fold up before the almighty dollar? Or will they decide instead to protect themselves by blocking capital movements to the United States and creating a new clearing mechanism for international trade that does not rely on dollar reserves? That could destabilize the dollar and give us a nasty return of inflation.
The other great uncertainty, and perhaps the critical one, is Europe—an integrated continental economy that rivals the United States in scale. Europe’s problem is that political and economic dissolution—fueled by Trump’s rise—could happen at any time. If major (or even minor) eurozone countries start splitting from the euro, the resulting credit events could become Trump’s equivalent of Lehman Brothers, or more accurately, of the Mexican debt crisis of August 1982. This would result in a financial shock that upends all plans, crushing high-end exports, bringing attention back to the exposure of American banks, and forcing policy reversals on both the monetary and the fiscal fronts.
As I argued in The End of Normal (2014), these conditions deepen the need for effective and universal social insurance, for demilitarization, for breaking up the banks—that is, for protecting the vulnerable while cutting back on excessive social overhead costs. Clinton’s Democrats offered no such basic reforms; their mindset was on modest new programs such as a federal childcare program, which assumed an underlying economy in good shape. The election made clear that for far too many voters, it isn’t. In the face of Trump and this plain rebellion against regulations and corporate taxes, I would argue now also for guaranteed jobs and for a shift of the tax base from sales and small-business profits to land and rents. This would be a pro-jobs, pro-small-enterprise tax policy and fundamental financial reform. It is exactly the opposite of what is now being considered, a program that would shift the tax burden onto consumers while giving big businesses incentives to replace workers with robots and touch-screens.
Curing the jobs problem requires us specifically to identify needs—care, health, the environment, education, culture—and to create institutions that can serve them. The usefulness of these jobs will not be measured by their contribution to GDP, nor to productivity, and in these respects, the entire relationship between economic statistics and welfare needs an overhaul. The right measure is whether we can fund, supervise, and sustain useful employment, meeting vital social needs and providing decent pay. Institutions that do this, generally, will not be those normally created to pursue profits, and so it is necessary to strengthen the non-profit and public sectors to get this done.
Today, advocates of a job guarantee program are the economists most strongly rooted in the original New Deal tradition, and their proposals deserve a hearing that, so far, they have not received. Part of the foundation of such thinking is that guaranteed jobs and a high minimum wage would reduce—radically—the money we currently spend on such programs as unemployment insurance, food stamps, disability, and other bits of what used to be called “the dole.” They would thus work to restore the balance between personal incomes and public welfare spending.
The progressive alternative to an economic program of reckless stimulus and real-estate capital gains is a program of full employment, fair wages, and broad investment in social, cultural, and environmental needs, backed by taxes that fall directly on rents, monopoly profits, and on inheritances, thus directly dismantling the dynastic oligarchy that has been running the United States, through both parties, since 1981. How precisely progressive action along these lines can be made to work is a matter for study and argument. But this needs to begin now. Intellectually and politically, the Democratic Party is in ruins. It cannot be rebuilt solely from a defense of past achievements, nor by reacting to disasters that lie just ahead, nor from simple economic models or fragments of a half-baked agenda. It is time, in short, for a left program at least as radical as that about to be enacted by the right.
James K. Galbraith holds the Lloyd M. Bentsen, Jr., Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas. He is the author of The End of Normal: The Great Crisis and the Future of Growth (Simon and Schuster, 2014), and more recently Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe (Yale University Press, 2016).
* “Can Trump Overcome Secular Stagnation: Part One, The Demand Side,” Real World Economics Review, Spring 2017.