President Trump Surfs A Prosperity Wave That Could Grow Larger
Yet, so far, it’s pretty well grounded. The Bureau of Economic Analysis reports real GDP growth rate of over 3% for both the second and third quarters of 2017, substantially greater than the rate of the two previous years. If it keeps up it represents a significant breakthrough.
That’s a breakthrough that plenty of naysayers claimed impossible. It is one that some “until the last dog dies” Dems still deny.
Does President Trump deserve the credit for this wave of handsome growth?
Skill? Luck?
Politically, doesn't matter. Voters just want results.
Accordingly to Washington Post economic columnist Robert Samuelson, Fed Chair Janet Yellen deserves the lion’s share of the credit:
In practice, presidents’ influence over the economy is limited. If it were otherwise, we’d live in an economic paradise.
Unemployment would always be low, wages would always rise, and recessions would never occur. No one has that kind of power.
Presidents and their agencies can’t govern the business cycle. ... Under Yellen, the economy has made huge progress. Here’s the record since she became Fed head in February 2014: Payroll employment has expanded by nearly 10 million jobs; the unemployment rate has dropped from 6.7 percent to 4.1 percent; average hourly earnings, uncorrected for inflation, rose from $24.32 to $26.55. (Corrected for inflation, the wage gain is about 4 percent — not great but not stagnation either. The pace, if maintained, would be roughly 10 percent over a decade.)
Also giving the Yellen Fed high marks is one of the most highly esteemed monetary economists working today, Scott Sumner. For the benefit of those (unlike me) who were not born and bred in the monetary policy briar patch Sumner was called by The Atlantic Monthly: “The Blogger Who Saved The Economy.”
Sumner is the author of The Money Illusion, an excellent blog that has relentlessly made the case since 2009 for an eccentric policy called "NGDP targeting." This is a complicated sounding plan with a simple idea at its heart. If the equation that solves the economic crisis is "GDP growth + inflation = 5%" then the solution to low GDP growth is inflation that brings us up to 5%. Therefore, the Federal Reserve should announce that it will do everything in its power to raise inflation expectations until we're back to where we want to be.
Three years ago, this idea didn't have a stable home outside the wilderness of The Money Illusion. But it slowly gained credence among bloggers, economists, and finally, the Federal Reserve itself.
Sumner, now at Mercatus Center, wrote earlier this year at The Money Illusion, An even greater moderation?
Per Wikipedia:
He went on to demonstrate this phenomenon in multiple experiments. In case after case, he showed that people disregard even obvious facts and figures in favor of more vivid descriptions.
In essence, the easier people can picture something in their heads, the more they believe it.
“The confidence that individuals have in their beliefs depends mostly on the quality of the story they can tell about what they see, even if they see little,” Kahneman later wrote in his best-selling book, “Thinking, Fast and Slow.”
Long story short: stories drive decisions. Data is difficult to decipher when it’s isolated, but it becomes meaningful if packaged with familiar or evocative concepts.
Anyone that ignores this reality is fighting against human nature. That’s a war you can’t win.
President Trump, uncharacteristically without much fanfare or drama, recently made and announced what is and will probably be the most important action respecting economic policy of his entire first term. Trump nominated Fed Governor Jerome Powell to succeed Chair Yellen at the Fed.
Powell has been described as a Yellen-like “cautious dove.” "Cautious hawk" might be more apt, yet all to the good.
Also, Memo to Fed Chair-designate Powell. Benn Steil and Benjamin Della Rocca, writing recently at the Council on Foreign Relations, warn Powell of the danger of becoming an Accidental Hawk:
Trump’s appointment of Powell may have secured the sustainability of “the greater moderation,” permitting economic expansion to continue -- and grow. This may be far more significant than the recent high-profile tax cut passed in the Congress and signed into law with great fanfare by President Trump on December 22, who declared:
The classic Mundell/Laffer/Kemp/Reagan supply-side policy mix weighted the restoration of good monetary policy at least as heavily as, perhaps more than, tax rate reductions. The vanquishing of inflation by Chairman Paul Volcker certainly was as important in unleashing the tsunami of economic growth as were the tax rate reductions.
Volcker’s successor, Fed Chairman Alan Greenspan, eventually disclosed his own Secret Sauce behind the Great Moderation and its attendant sizzling growth. Greenspan, earlier this year, revealed that during the period of the Great Moderation he was carefully emulating the operation of the gold standard. As I wrote here:
The period of "following signals that a gold standard would have created," called the Great Moderation under President Clinton, was one of the most equitably prosperous in modern American history. That era saw the creation of over 20 million jobs. Robust growth converted the federal deficit into a surplus. It was, if only virtually rather than institutionally, a golden age.
To loop back to Chair Yellen for a moment. The Fed appears to have stabilized the dollar-denominated price of gold between $1100/oz and $1400/oz -- primarily between $1200 to $1300 -- since January 2014. This would appear consistent with the range maintained by Chairman Greenspan during the Great Moderation.
Brava, Chair Yellen! Will Chair Powell follow her example?
Let's hope so.
Greenspan’s secret monetary compass was inferred in 1995 by monetary economists William Lastrapes and George Selgin (now at Cato Institute), from the University of Georgia, in Gold Price Targeting By The Fed. Excellent deduction, Holmes! Greenspan, in the tradition of opacity deemed seemly by all central bankers, did not confirm this until over 20 years later. Yet there it is.
My favorite monetary economist considers NGDP targeting a (far) second-best option, after the classical gold standard. That said, for now, let us Gold Standard vs. Market Monetarist Bugs set aside our squabbles and cautiously toast the nomination of Jerome Powell and wish him great success.
Let this brief truce be undertaken in the spirit of humility, a quality for which I, neither an economist nor a PhD, am far more entitled than are Drs. Sumner and Beckworth. After all, as the Bank of England’s flamboyant governor Montagu Norman once said to a new staff economist, “We have appointed you as our economics adviser. Let me tell you that you are not here to tell us what to do, but to explain to us why we have done it.”
Thus, let us now praise President Trump for his appointment of Jerome “Cautious Hawk” Powell to the chairmanship of the Fed. And let us hope that the President’s astute appointment will lead to a continued, even heightened, organic economic expansion through 2018 and beyond.
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Ralph Benko is an advisor to nonprofit and advocacy organizations, is a member of the Conservative Action Project, a contributor to the contributor to the ARRA News Service. Founder of The Prosperity Caucus, he was a member of the Jack Kemp supply-side team, served in an unrelated area as a deputy general counsel in the Reagan White House. The article which first appeared in Forbes.
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