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Trump’s Investment Boom — And Other Economic Myths

Trump’s Investment Boom — And Other Economic Myths

What sort of machine is the economy? The common conception is that it’s a fragile and sensitive device, highly responsive to both good and bad government policies. Pessimists worry that one or two wrong moves from Washington will cause it to seize up. Optimists think the right change in tax or regulatory policy can supercharge it.
The administration shares this general outlook.

Early in Donald Trump’s presidency, he and his economic advisers hailed what was coming. With Trump’s policies, declared Stephen Moore, “four percent growth can and should be the new normal in America.” After the president signed his big tax cut, Lawrence Kudlow said, “We’re on the front end of an investment boom.”

It was a nice fantasy. In 2017, real GDP grew by 2.2 percent; in 2018, it increased by 2.9 percent. In 2014 and 2015, under Barack Obama, the figures were 2.5 percent and 2.9 percent.

The investment boom hasn’t happened. “A slim five percent rise in 2019 capital spending is in store, down from last year’s six percent gain,” reported Kiplinger last month. “That is a small annual gain compared with past decades, when double-digit increases in capital spending were relatively common.”

The administration didn’t have any magic dust. Economic growth appears to be settling down around the level that Trump disparaged when Obama was president. The new normal is not much different from the old normal.
The latest Wall Street Journal survey of 60 economists found that they expect real GDP growth to total less than 2 percent in the second, third and fourth quarters of 2019. In 2016, the term Stephen Moore used for that rate of growth was “sluggish.”

“It’s no surprise,” Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, told WBUR. “Nearly everyone who looked at this, other than the Trump administration itself, felt that this would have very little effect on the economy.”

Trump’s critics, however, have also exaggerated his importance to the economy. Immediately after the election, Princeton economist and New York Times columnist Paul Krugman predicted a global downturn — though he quickly retracted that forecast. A year ago, Bank of America Merrill Lynch economist Ethan Harris warned that Trump’s trade war could cause a recession.

So far, however, the U.S. economy has kept chugging on along. Some sectors, particularly agriculture and autos, have suffered, but their troubles haven’t spread too far. The looming prospect of a bigger trade war with China and Europe has yet to throw much sand in the gears.

If anyone has shown presidents don’t matter for the economy, it’s Trump,” George Mason University economist Tyler Cowen told me. “All the uncertainty simply has not stalled the recovery.”

Other economists think Trump has had some effect on the economy. Says John Cochrane of Stanford University and the Hoover Institution, “The recent boost in growth does have something to do with deregulation.” Northwestern’s Robert Gordon says the tax cut boosted GDP growth, but only temporarily. He also says, “The uncertainties around tariffs and trade have contributed to caution on the part of businesses.”

But Trump has made less difference, for good or ill, than most people expected. The evidence suggests that for the most part, the economy is not fragile and flighty but sturdy and resilient. It’s not a lightweight canoe that requires endless adjustments and can be knocked off course by every ripple or breeze. It’s an aircraft carrier, moving forward in fair weather or foul and not easily stopped.

The tax cut that Trump said would be “rocket fuel” for the economy looks more like regular unleaded. The administration, however, is not about to admit that its policies are mistaken or ineffectual; it has to be that some powerful, sinister force is impeding them.

That would be the Federal Reserve, which the president and his allies blame for not cutting interest rates. But if his policies were as potent as we’ve been told, they would not wilt because our low interest rates are not a quarter-point or a half-point lower.

Back in 2016, Moore wrote: “The lesson of the Fed under Ben Bernanke and now Yellen is that easy money is no economic solution to this decade-long malaise. As economist Larry Kudlow puts it: ‘The Fed can print money, but it can’t create jobs.'” Now, they see easy money as the only hope.

Everyone knows how to take care of the economy, and often they’re wrong. Fortunately, it can usually take care of itself.

U.S. Accused Of Illegal 2008 Seizure As AIG Trial Opens

U.S. Accused Of Illegal 2008 Seizure As AIG Trial Opens

Washington (AFP) – The U.S. government’s emergency actions in the financial crisis went on trial Monday as lawyers accused it of having illegally seized teetering insurance giant AIG in September 2008.

David Boies, the lawyer for Hank Greenberg, the former chairman of American International Group, sought to make a case that there was no need for the government to take the company over even if it appeared insolvent as the financial system was melting down.

Providing AIG with liquidity, as was done with banks at the time, was all that was necessary to stabilize the situation, Boies argued.

But instead the government took a step further, injecting $85 billion into the company for a nearly 80 percent share of ownership, erasing much of the value of the equity of existing shareholders.

Boies accused the government of “illegal exaction” that was backed up and justified by efforts to “demonize” the company, which Greenberg, 89, had built into the world’s largest insurer.

The government had already made a fully-secured loan to the insurer, Boies said as the trial opened.

“They had a loan that they charged extortion interest rates on… and yet they reached out to grab 79.9 percent of the AIG shareholders’ equity,” he said.

“There was especially no justification of the taking of equity.”

But government attorney Kenneth Dintzer defended the takeover, saying a collapsed AIG would have cause much more damage.

“The goal was not to save AIG. It was to save the world from AIG,” he said.

AIG shareholders were in fact helped by the rescue, he argued.

“No one can pretend they would be better off without the government’s intervention… 20 percent of something is better than 100 percent of nothing.”

Greenberg is suing the government via his Starr International Company, which was the largest single shareholder in AIG at the time of the government rescue.

Starr still holds about 1.3 percent of the company and is seeking $40 billion for its losses.

Key witnesses expected in the six-week trial include former Federal Reserve chairman Ben Bernanke and ex-New York Federal Reserve Bank President Timothy Geithner, who later became treasury secretary.

Both were instrumental in the takeover of the company, which as a privately owned insurer was not regulated by the Federal Reserve.

The trial will force Bernanke and Geithner to rehash the events of 2008, when they had to orchestrate the rescues of investment bank Bear Stears, housing finance giants Fannie Mae and Freddie Mac, and brokerage Merrill Lynch before letting Lehman Brothers collapse and then seizing AIG.

At the time they justified the takeover of a private non-bank by arguing that “a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.”

The bailout gave AIG the necessary liquidity to stay afloat, sparing the giant insurer a possible bankruptcy that could have devastated the global financial system.

At the same time, shareholders like Starr saw their stakes plummet in value by the dilution from the government, which ultimately put $182 billion into AIG.

The trial could also put in focus one of the government’s most controversial actions during the crisis that has never been clearly justified: paying out tens of billions of dollars to AIG’s counterparties in credit derivatives, including both Wall Street banks like Goldman Sachs and foreign banks like DeutscheBank.

Critics say the Fed should have demanded the counterparties accept less than the face value of their credit default swaps, since they would have gotten nothing if AIG failed.

AFP Photo/Stan Honda

Yellen Takes Over Fed As Bernanke Departs

Yellen Takes Over Fed As Bernanke Departs

Washington (AFP) – Respected economist Janet Yellen was sworn in Monday as the first woman chair of the Federal Reserve, taking on the burden of winding down the Fed’s stimulus without spurring more turmoil.

Yellen inherits the mantle of the world’s most powerful central banker from Ben Bernanke, who guided the U.S. and the global financial system through its deepest crisis since the 1930s during his eight years in the job.

Nominated to the job last October by President Barack Obama, she will serve a four-year term concurrent to her ongoing 14 year term on the Fed’s board of governors.

The respected economist has worked closely with Bernanke during her three-plus years as Fed vice-chair, and is not expected to depart from his policies aimed at helping lower still-high unemployment levels as long as inflation remains tamed.

Yellen, 67, has served in a number of positions in the Fed, including head of its San Francisco branch, and also has held academic positions at Harvard University and University of California at Berkeley.

She is married to economics Nobel prize winner George Akerlof.

Bernanke will return to academia, meanwhile, including joining the Washington-based think tank the Brookings Institution as a resident fellow.

“He will be a major contributor to the task of understanding the momentous events of the past eight years and crafting imaginative, pragmatic strategies to ensure the stability of the national and global economy,” said Brookings president Strobe Talbott.

Fed Cuts Another $10 Billion From Stimulus Program

Fed Cuts Another $10 Billion From Stimulus Program

Washington (AFP) – The Federal Reserve stayed the course on tapering its stimulus for the U.S. economy Wednesday, reducing its asset purchases by $10 billion for the second month in a row.

The Fed, as expected, cut the stimulus to $65 billion a month, while leaving its benchmark interest rate near zero, citing “growing underlying strength in the broader economy.”

Wrapping up the two-day monetary policy meeting of the Federal Open Market Committee, the last of outgoing Chairman Ben Bernanke, policy makers noted that despite some mixed economic indicators since the December FOMC meeting, overall the U.S. economy was doing better.

Information indicates “that growth in economic activity picked up in recent quarters,” the FOMC said in a statement.

“The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced,” it said.

Photo: AFP Photo/Brendan Smialowski