Cleaning Up the Mess – Part 3, the Economy
When the next President takes office in 2021, the US economy, the federal budget and the vulnerable people and regions of America could be in dire straits.
We know that the US will be running annual budget deficits of $1 trillion or more. We may be in a recession, its length or depth unknown; we don’t know whether it will hit the financial markets, the housing markets, manufacturing, agriculture energy or the service sector or all of the above. We may still be in a trade war with China, hiking the costs of many consumer goods by 15-25%. The lower income half of all Americans have still not fully recovered economically from the Great Recession, and younger generations are mired in student debt and unable to afford their first family home. The depth of economic distress in regions like the Appalachians and the Mississippi Delta may be continuing unabated or worsening. Manufacturing may still be in recession, and American farmers may still be in dire straits due to the trade war with China. Our allies and trusted trading partners may be few and highly alienated. Our trade deficit may be large and growing. Alternatively, the trade war may be over and the economy could be improving; let’s hope for the latter, but at least contemplate and be prepared for the former.
George W. Bush left a catastrophic financial mess all over the world and a botched war in Iraq for Barack Obama to clean up after the financial collapse that initiated the Great Recession. Bill Clinton had an out of control federal budget deficit to remedy after the tax cutting bonanzas for the top incomes during the Reagan-Bush years. Jimmy Carter had economic stagflation, national malaise and an oil crisis on his hands after the Nixon-Ford years, and Ronald Reagan inherited all of the above plus the Iran hostage crisis from Carter. Nixon inherited an unwinnable Vietnam War, three political assassinations of the nation’s leaders, cities on fire and a divided nation from LBJ.
By comparison, George W. Bush inherited a balanced budget, a nation at peace and an incredibly strong, fast paced economy from Bill Clinton. Likewise Donald Trump inherited a strong economic recovery, a well-respected nation at peace, and a steadily declining budget deficit from Barack Obama.
Donald Trump will leave to our next President -- a large and growing federal budget deficit, conceivably an economy damaged by his incessant tariffs and trade wars, and a badly divided nation with few strong allies left.
Counteract the recession if it happens
If we are in a recession, the traditional recession fighting tools are economic stimulus through tax cuts, deficit spending and reducing interest rates via the Federal Reserve. President Trump has already used all three to boost the economy when it was already doing reasonably well – producing a short sugar high. It’s not clear how much flexibility in fiscal and monetary stimulus will remain available to restart the US economy during the next recession. Republicans may prove to be in a particularly sour mood to cooperate after losing a Presidential election and may well still be in charge of the US Senate.
Reduce budget deficit
We are running trillion dollar deficits as far as the eyes can see or the forecasters can forecast. Interest on the national debt will eat up a growing share of GDP. Our next President will have to either raise taxes or cut spending or both. You cannot do either if we are in a recession, but we will still need to restructure our financing of the federal government when conditions improve; we are living on borrowed time. Trump’s tax cuts for the top income need to be repealed; deductions for top earners need to be capped, and capital gains need to be taxed as ordinary income. Hedge fund operators need to be taxed like ordinary people, not exempt financial demi-gods. Corporate deductions need to be reconfigured as well so that the immensely profitable and powerful concerns actually contribute their fair share to funding the national government. We are going to need to look at new financing for Social Security and Medicare as we do not have enough workers to sustain the aging baby boomers. It is essential that the growth in per capita health spending for Medicare, employment based coverage and Medicaid be capped at the CPI, and that provider rate increases be similarly restrained, and we move to negotiate rates for prescription drugs. Trump has engaged in a spending spree on the military at a time when we are not at war with anyone and disengaging from the Middle East conflicts; military spending needs be reduced accordingly. Agriculture subsidies need to be reconfigured so they benefit the small family farmers (who are aging out; we must recruit new younger farmers) not the large agribusiness interests.
The competitiveness of the US economy is still strong; we now rank #1 according to the World Economic Forum, but we need to make significant improvements. https://hbr.org/2012/03/the-looming-challenge-to-us-competitiveness These include better performance of our K-12 education, a more effective health system, better transportation, more productive manufacturing and correcting the inability of the federal government to make decisions to move us forward. “The U.S. was given a competitiveness score of 85.6 out of 100, with its strengths including business dynamism, its labor market, and the financial system. However, the report noted that the U.S. economy was being held back by a weakening social fabric, worsening security, lack of IT adoption, and corruption. It also lagged behind most advanced economies in terms of health, with the country’s life expectancy three years below the average of advanced economies.” https://www.cnbc.com/2018/10/17/us-named-the-worlds-most-competitive-economy.html
We have become a nation increasingly divided into high performing regions, such as Silicon Valley, Boston, New York, Houston or Seattle and low performing regions such as the old coal mining regions of Appalachia or the old cotton growing regions of the Mississippi Delta. We need to start to pay attention to the increasingly wide variance in economic opportunity between US regions and what can be effectively done to improve regional economic development. See https://www.brookings.edu/podcast-episode/the-geography-of-prosperity-how-to-help-the-areas-lagging-behind/ and https://www.brookings.edu/multi-chapter-report/place-based-policies-for-shared-economic-growth/.
Research from the Harvard Business School recommends we focus on empowering and building on successful regional economic clusters and enhancing their performance. “This paper evaluates the role of regional cluster composition in the economic performance of industries, clusters, and regions. ... We find that ... there is strong evidence for cluster-driven agglomeration. Industries participating in a strong cluster register higher employment growth as well as higher growth of wages, number of establishments, and patenting. Industry and cluster level growth also increases with the strength of related clusters in the region and with the strength of similar clusters in adjacent regions. Importantly, we find evidence that new regional industries emerge where there is a strong cluster environment. Our analysis also suggests that the presence of strong clusters in a region enhances growth opportunities in other industries and clusters. Overall, these findings highlight the important role of cluster-based agglomeration in regional economic performance.” https://www.hbs.edu/faculty/Pages/item.aspx?num=43562
I thought Representative Tim Ryan captured it best when he urged us to rebuild Midwestern manufacturing with the production of solar panels and self-driving cars. And President Trump captures it worst when he seeks to order local power plants to buy coal from one of his largest campaign contributors, and Senator Cramer (following the President’s lead) then seeks to coerce the federal agencies to contract with one of his largest campaign contributors to build the antediluvian Trump wall.
In the oddest of juxtapositions, President Trump’s biggest fan boys are in the regions and industries that need the most help, and he has absolutely nothing really to offer them, while the huge Democratic field has yet to produce a message and a messenger that speaks to the severe regional economic distress parts of our nation are experiencing. For me Tim Ryan and Cory Booker thus far have come the closest.
Prepared by: Lucien Wulsin