Welcome to the World’s Least Ugly Economy
Despite inequality, debt, and a tariff war, the U.S. economy is still the strongest.
U.S. President Donald Trump delivers his first State of the Union address in Washington on Jan. 30, 2018. (Win McNamee/AFP/Getty Images)
BY MICHAEL HIRSH
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Economic competition among nations is more of a beauty contest than a footrace. In reality, every economy performs under its own spotlight. By that reckoning, as the new year dawns, it’s already obvious which economy is likely to be crowned Miss World 2019.Yes, it’s last year’s pageant winner, the still-booming U.S. economy. Despite the recent turmoil on Wall Street and problems with income inequality, debt, and policy paralysis—and the tariff war launched by President Donald Trump— most economists say the United States is far outpacing all rivals in growth and stability.
At the very least, “the U.S. keeps coming out tops in the least ugly contest,” said Adam Posen, the president of the Peterson Institute for International Economics (PIIE). “It gets uglier all the time, but it’s still winning.
“The world will be a worse place under many of the things the Trump administration is doing, and the environment for private sector investment will get worse for everybody, including in the United States. But the United States will maintain a relative lead for some time to come.”
A quick survey of other major economies around the world explains this simple reality: Everyone else’s situation is much uglier. Britain is beset by Brexit, and Europe is grappling with an exploding budget crisis in Italy (its fourth-largest economy), along with governance issues so deep that they verge on existential. China, burdened with a dangerous amount of corporate debt, is slowing to such a degree that most experts see it as a likely flash point in the year ahead. Japan’s super-slow growth rate—an annual expectation now because of its shrinking population—isn’t causing it too much trouble (1 percent growth can be adequate if fewer people are producing), but Tokyo is still saddled with high public debt.
The Organization for Economic Cooperation and Development is still holding to its assessment from last fall that the United States is set to grow faster than the other G-7 countries in 2018 and 2019, and the differences among them are only widening. The International Monetary Fund (IMF) is forecasting close to 3 percent growth, though that could go as low as 2.5 percent because of the escalating tariff war and the waning effect of Trump’s 2017 corporate tax cut stimulus.
“If you just look at growth rates, the length of the expansion, the level of unemployment, and very subdued inflationary pressures, all those things look good,” said Gian Maria Milesi-Ferretti, the deputy director of the IMF’s research department. Europe, by contrast, “looks like it is slowing more rapidly than we had envisaged. “Now, of course, you also have a very substantial fiscal stimulus in the system, an unprecedented one for an economy at full employment.”
Some economists are more pessimistic. Late last year, the bond yield curve became inverted: Some longer-term bonds began paying less than shorter-term bonds, suggesting widening market fears that a U.S. recession could loom sometime in the next two years. Goldman Sachs’s chief economist, Jan Hatzius, predicts that after enjoying 2.5 percent and 2.2 percent growth in the first two quarters of 2019, the fading tax cut stimulus and tightening by the Federal Reserve will drive U.S. growth down below 2 percent in the last two quarters. But even a deceleration of that magnitude would still leave the U.S. economy looking a little less ugly than Europe’s or Japan’s.
Trump is all too familiar with beauty contests, of course. (He once co-owned Miss Universe.) And the president is now taking all the credit for guiding the United States to the world crown, saying his tax cut “unleashed an economic miracle.” In fact, apart from the sugar high that his tax cut and deregulatory moves gave to an already surging economy, little that Trump has done has made much of a difference. (Indeed, his trade war is creating new headwinds.) Corporate profits are up, and even long-stagnant wages are starting to rise.
All this offers yet another lesson in how a society and its politics can sometimes seem diseased—in America’s case, viciously divided by hatred and violence, political paralysis, and a widely unpopular president—without affecting the rude health of the underlying economy. As Adam Smith once noted, “There is a great deal of ruin in a nation.” In other words, it takes a lot of screwing up by political leaders to disrupt an economy.
The reality is that Trump is perhaps one of the luckiest presidents in decades because he is reaping the unique benefits of a host of recovery policies put in place during the preceding eight years.Together, these policies have generated one of the longest periods of continuous economic growth in U.S. history, in which January would mark the 100th straight month of job creation. That is the longest stretch since records have been kept.
Harvard University’s Kenneth Rogoff, who co-wrote what is widely considered the definitive book on financial crisis recovery, This Time Is Different, said the very factors that made the 2008 crash so devastating and enduring in impact are now helping to extend the recovery. “You’re going to see that the next 10 years will be better than the last 10 years.”
Part of the reason the boom has been so sustained is bound up with the 2008 crisis itself. Serious financial crises lead to a particular kind of recession (usually more severe, according to Rogoff and his co-author, Carmen Reinhart) and a particular kind of long-term recovery. In a normal recovery, when demand bounces back, people start to buy a lot of goods. But after a financial crash, people take a long time to deleverage and improve their personal, business, or local government balance sheets. Thus, recoveries come slower and less robust at first, but there is a longer-term payoff in stable growth.
“Once people finally have their balance sheets in a good place and their confidence up, they start to spend and invest and hire more. I think that is what we have seen here,” said Gene Sperling, who led the National Economic Council under former President Barack Obama. “Every single positive thing Trump wants to brag about was just a continuation of a trend that had been in place for years under Obama.”
Many economists, such as Posen and Rogoff, foresee problems for the U.S. economy due to social and political upheaval tied to income inequality, which is barely being addressed. “We’ve made a lot of longer-run compromises,” Rogoff said. Apart from corporations, the tax cut benefited mainly the rich, for example, while tariffs and cutting back on immigration will hurt the economy in the long run. What the U.S. economy is doing under Trump is “closer to taking steroids than sugar,” Rogoff said. “You feel good for many years until eventually things catch up with you.”
Even so, there is a broad consensus that the real economic crises in the foreseeable future lie abroad.
According to Adam Tooze, a professor at Columbia University, China and other emerging markets are the “central driver of global growth right now,” but there are serious questions about whether Beijing’s autocratic and increasingly inward-looking leader, Xi Jinping, and his bureaucracy can handle the growth slowdown or unwind the “extraordinary buildup of debt” in Chinese companies. Faced with a barrage of Trump tariffs, China’s estimated growth for 2019 has been reduced to 6.2 percent, according to the IMF. That’s good for most economies, but the authoritarian Chinese government has generally required faster growth to satisfy a restive population.
While India and countries in the Association of Southeast Asian Nations appear stable, Latin America is “struggling,” said Milesi-Ferretti, the IMF economist. Argentina is slowing, growth in Brazil and Mexico is subdued, and Venezuela is a catastrophe. Meanwhile, the refusal of the Italian government to bow to budget-cutting demands from the European Commission has led to the latest existential crisis in the EU, where demands for austerity by Germany, the largest economy, have put it in a seemingly permanent state of conflict with other economies.
“In the current context,” added Posen, PIIE’s president, “where there is so much anti-Europe sentiment and economic nationalism—look at Hungary, Poland, and [Marine] Le Pen continuing to snipe at [President Emmanuel] Macron’s heels in France—you have to conclude: Yeah, maybe, once again, we’re still the least ugly.”
This article originally appeared in the Winter 2019 issue of Foreign Policy magazine.
