Trump’s trickle dries up

“The economy now has hit 3 percent. Nobody thought we’d be anywhere close. I think we can go to 4, 5, and maybe even 6 percent.” – Donald Trump, Dec. 16, 2017

Well, Trump’s boast turned to dust in 2019. US GDP grew by 2.3% in 2019, well below President Trump’s promise of 3%+ growth. The most recent GDP number proved that the tax cuts championed by Trump had no sustained impact on US growth.  Indeed , even the most optimistic forecasts see growth to stay well below 3% for the next few years. Of course, that won’t stop Trump in his State of the Union speech today in Congress proclaiming a huge rise in the living standards of working people under his reign.  Actually, cumulative growth under Trump has been lower than under both Obama and Bush Jnr.

US real GDP growth yoy (%)

Leading mainstream economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, used to serve as the chief economist and economic adviser to Vice President Joe Biden.  He points out that the Trump administration’s bullish forecast was based on the belief that the tax cut developed and passed by Trump and the Republicans at the end of 2017 would increase the economy’s trend growth rate. “Trump and his economic team have long argued that the tax cuts — especially the big drop in the corporate rate from 35% to 21% would kick off a virtuous cycle delivering lasting growth above the roughly 2 percent that has prevailed for the past two decades. The idea was that lower corporate rates would incentivize more capital investment in things like factories or large equipment and that this added capital stock would permanently boost the economy’s productive capacity.”

As Bernstein says, this is ‘trickle-down’ economics as popularized by economists like Art Laffer and Rober Mundell, wherein tax cuts targeted at investors trickle down through the broader economy, lifting growth, wages, and spinning off more tax revenue to help offset the tax cut’s initial cost.  But this has turned out to be nonsense.  On the contrary, real business investment has declined for three quarters in a row, the worst such stretch since the last recession.

Why did Trump’s trickle-down economics not work?  Bernstein answers that Keynes explains all.  You see, there is a lack of effective demand in the private sector.  And “Keynesian economics, in this context, argues that in periods when private sector demand is inadequate to achieve full employment, the government should step in and temporarily make up for the lost demand through deficit spending.” 

So it’s a lack of demand in the private sector.  It’s clearly not household consumption or demand, which continues to rise.  Indeed, Trump can boast that hourly wages (but not weekly earnings) are rising at nearly the same pace as they were just before the Great Recession in 2008 under Obama.

But it is business investment that is falling.  So, according to Bernstein, the capitalist economy needs “Keynesian fiscal jolts give economies a temporary boost by using, for a limited time, public-sector demand to offset lagging private-sector demand.”  Just for a limited time, mind; once capitalist investment is back on its feet, we can curb public investment and spending.  Although Bernstein notices that it may be necessary to “relentlessly go back to the Keynesian fiscal well year-after-year” or “we should expect such benefits to fade, as they have.  Bernstein decides that “given the corporate sector’s unwillingness to invest their elevated after-tax earnings…we should consider a large public investment program” to boost productivity and ‘human capital’ (skills and education) and also to mitigate the effects of global warming.

Yes, capitalist investment ‘demand’ is too low.  But what Bernstein, and for that matter Keynesians in general, never explain is why the capitalist economy gets into this state of a lack of demand.  Private sector demand is too weak, ie businesses are not investing enough in productive activities.   But why?  There is no answer from Bernstein – it seems it just happens every so often.  And when it does, government must intervene to “make up for the lost demand”.

Keynesian guru Paul Krugman wrote a short book in the depth of Great Recession.  It was entitled End this depression now! – with the exclamation mark prominent.  In it he said, it matters less why there was a slump (in demand); more important was to take action to boost government spending to end the slump (in demand).

But surely unless we know why such recessions (or for that matter slowdowns in investment growth) take place at recurring intervals, we shall be trying to judge forever the amount of ‘limited time’ that governments need to run budget deficits and spend more or less.  And such macro-management of capitalist economies has never been successful.

Actually, there is plenty of evidence that can explain the ups and downs of business investment.  It is not changes in interest rates; and it is not sudden changes in ‘business confidence’, as many mainstream economists argue.  Those are usually the consequence, not the cause of low demand.  The fundamental cause under capitalism is profitability and the movement of corporate profits.  The evidence for that is in abundance.

The US rate of profit on productive capital remains well below where it was in the late 1990s.  It was hardly boosted by the depreciation of assets in the 2008-9 recession.

Source: Penn World Tables 9.1 IIR series

And this applies to the current real GDP growth in the US.  Growth is much lower than Trump hoped for because businesses have not invested productively but used the extra cash from tax cuts to pay larger dividends to shareholders; or buy back their own shares to boost the price; or to shift profits abroad into tax havens.  They have not invested as much in new structures, equipment etc in the US because the profitability of such investments is still too low historically; and especially relative to investment in the ‘fictitious capital’ of the stock and bond markets, where prices have reached all-time highs.

Indeed, non-financial sector profits have fallen 25% since 2014!  Trump’s corporate tax cuts helped post-tax profits for a while, but pre-tax profits have continued to fall.

Source: US BEA NIPA tables

The bulk of productive investment decisions remain in the hands of big business.  Out of the 20% of US GDP in investment, only 3% is public investment and much of that is military spending.  Until that ratio is reversed, “relentless Keynesian” fiscal spending will no more boost growth than ‘trickle-down’ economics.  Only a good, deep recession can restore profitability by sharply reducing the costs of fixed assets and new investments for those businesses that survive.

12 Responses to “Trump’s trickle dries up”

  1. Anti-Capital Says:

    “Only a good, deep recession can restore profitability by sharply reducing the costs of fixed assets and new investments for those businesses that survive.”

    Well, we had a “good (!) deep recession” and it’s even restored profitability in the US, and maybe Greece, and it hasn’t exactly resolved “the problem” or triggered the “perfect wave” for our Kondratiev-surfers, has it? FDI flows are, to put it mildly but accurately, depressed. Growth in the EU is back to zero. Japan? anyone for a fourth recession?

    I think there’s more to this than simply the cost of fixed assets, or more properly the costs of production. Actually there’s more to profitability than the costs of production. There is the ability to expand markets and not smother that expansion in overproduction, which is why we are where we are– in the midst of another global trade slowdown, with tariffs, and beggaring thy neighbor strategies.

    In the US automobile manufacturing utilization of total capacity has fallen from 89% in 2015 to approx 77% in the 4Q 2019, a level below the low of the 2001 recession BUT still above the 2009 trough of 32 percent (now that’s what I call a “deep recession”). Interestingly enough, that 2019 level is still greater than the utilization rate in 2007, as auto makers had vastly increased capacity.

    So that’s where we are today: “greatly” improved from the dark days of 2009, but still below the 2001 low and the 2007 peak for rates of utilization.

    Can’t wait for China to start exporting its cars to the EU and North America. You think is a trade war? You ain’t seen nothing yet. That’s when all the cruise missiles get reprogrammed with targets in China.

    • gonzogil Says:

      “There is the ability to expand markets and not smother that expansion in overproduction, which is why we are where we are– in the midst of another global trade slowdown, with tariffs, and beggaring thy neighbor strategies. ” Yeah, but believe this does not add extra independent variables, but it is more like trying to get away from the clogging of profitability and try to set up better labor market “business-friendly environments” elsewhere: which is what they insist upon every time they want to outsource. In terms of the priorities, they insist upon first and foremost is the devaluation of currencies to get the labor market prep for expansion they want.

    • Antonio Says:

      ‘or triggered the “perfect wave” for our Kondratiev-surfers ’’.
      True, users of Kondratiev cycles are somewhat surfers, except M.R, but …
      If you also call the Kondratiev cycles, and more correctly, revolutionary cycles, class struggle cycles, cycles of subject-capital, or some other name synonymous, it is possible that the following happened: 1º.- you understood more and better than It happens in the World-System since the Neolithic, and 2nd.- you might want to surf in one of your ‘perfect wave’. Specifically, in the wave that began in 1917 and will most likely end over the year 2,050. And perhaps, from his surfboard at the top of the wave, he had a fairly probable and certain panoramic view of the economic events (events since the 80s in the regressive phase of the wave: privatization of all assets and state activity , under growth only of monopoly corporations and countries, markets in increasing monopolization, and extreme inequality, the opposite being true in the progressive phase since 1917) and politicians (parliaments with reactionary left- Syriza, Podemos, from F. Miterrand, T. Blair , etc …-, and an ascent, only brief and temporary, to the Government, of the extreme right-B. Jhonson, Trump, Salvini, M.Le Pen-) of the next 30 years. Economic and political facts that should give rise to the 3rd and final? impulse (after the impulses of 1917-Russia and 1949-China. Impulses theorized by Rosa Luxemburg and Ragnar Frisch, among others) of the socialist mode of production. If that is the paronym visible from a wave Kondratiev can be worth the effort to climb and surf in it, do not you think? Try …
      The following, in the form of a rhetorical question, is an argument and evidence (and is little or nothing refutable, in my opinion) about the non-endogenous and capitalist character and its exogenous and revolutionary character of the Kondratiev cycles in which you can surf is this: do capitalist companies being the main and dominant economic actors of the capitalist model create and develop (promoting, allowing, etc …) themselves to their antagonistic company, to their extinct company, to the company that replaces them, is tell the state company ?. The state enterprise not only emerged in revolutionary Russia and China, but also emerged, multiplying its activity from 10% to 60/70% GDP / year in OECD countries in the upward phase of the Kondratiev cycle of the twentieth century Does the capitalist company create itself in the mode of socialist production? Just as I think socialism, the Welfare State, the rest of state enterprises … and the growth in the twentieth century created the ongoing Kondratiev wave.
      On the other hand, I recommend that you continue to maintain your fine humor. Humor especially desirable in this blog of theoreticians, heavy and little funny Marxists
      Regards,

  2. gonzogil Says:

    “Indeed, non-financial sector profits have fallen 25% since 2014!” That is f-ing demented even at the marginal efficiency of capital (in Keynesian terms) 3 years after the pivot to China, and ever since the amazonization of the U.S. workforce after 2008. 2008 being the latest push. I remember watching t.v. and people in the news telling workers “work for free, and maybe one day they will pay you. It will look excellent.” I am not kidding they were actually advocating people apply for zero wages. Not a joke.

    • jlowrie Says:

      ”I am not kidding they were actually advocating people apply for zero wages. Not a joke.”

      To be sure the bourgeoisie are fond of their jokes. Here are my favourite three.
      In third place:

      3) ”The Second World War was started by the Hitler/Stalin Pact of 1939.” Now the Japanese launched their all -out invasion of China in 1937, cheered on by Germany and Poland, who in turn themselves in 1938 invaded Czechoslovaki . By September 1939 millions of Koreans and Chinese are already dead. Though of course fascist Poland would have regarded such people as Untermenschen.
      Surprisingly or perhaps not, this joke seems to be appreciated by the fallen Trotskyist, Louis Proyect! What’s happened to Imperialism?

      In second place:

      2) By Niall Ferguson, Professor of History at Harvard University. Ferguson was born in Kenya, surrounded by black slaves (sorry, servants), attended Public i.e. private School in the U.K. and Oxford University. In short a scholar and a gentleman! A few years back Ferguson visited China and made a programme about it, which was broadcast as befitting an apologist for the British Empire ( ”on which the sun never set and the blood never dried”) by the British State propaganda organ, the BBC. Ferguson claimed to have come across a peasant ( and far be it for me to suggest any pecuniary transfers were made from Ferguson’s pocket to the peasant’s)who asserted that the great leap famine was so severe that parents were eating their own children! It is a sign of the contempt that the BBC holds for ordinary mortals that this foul joke was actually broadcast.

      In first place and undoubtedly the best fascist joke ever:

      3) The White emigre magazine ”The Call” in an edition of November1919 published an article ”Satanists of the Twentieth Century” in which it claimed the Soviet commissar for War, the ”Jew Trotsky” and other high ranking Bolshevik leaders had held a black mass within the Kremlin at which they had prayed to the Devil for help in defeating their White enemies. The Latvian member of the Red Army who reported this satanic ritual was executed the next day on Trotsky’s explicit orders!

      • Anti-Capital Says:

        “White emigre magazine ”The Call” in an edition of November1919 published an article ”Satanists of the Twentieth Century” in which it claimed the Soviet commissar for War, the ”Jew Trotsky” and other high ranking Bolshevik leaders had held a black mass within the Kremlin at which they had prayed to the Devil for help in defeating their White enemies”

        And didn’t Áñez, in Bolivia, announce the “return of the Bible” after the coup against Morales, and even cast out the representations of the indigenous religions Morales had displayed in the presidential palace?

        Yes, we’re all Satanists at heart– Jews, Bolsheviks, Marxists, communards, indigenous peoples, because after all, what could be more Christian than private property? Only slavery, I guess

  3. benl8 Says:

    The median per capita income versus the average per capita income — I checked now at St. Louis FRED, the graphs. Since 1974 the median has increased by 37%, the average has increased by 134%. Growth? Looks like most of the growth bypassed the middle level income and went to the top. “Real Median Personal Income”, and “Real Disposable Personal Income”, two graphs at St. L FRED. Marriner Eccles, chief of Fed from 1935 to 1946 or so, wrote that a giant sucking machine sucked the consumer demand away from purchasers and gave the profits to the richest depriving them of customers. I’m paraphrasing. Growth in the period 1934 to 1941 was fairly high, so the New Deal worked, and mostly because of direct government job creation, in my opinion. It was sustained except for the 1937 period. It’s sort of chicken and egg predicament, the causes seem so closely interrelated. Since year 2000 the average income has grown 5 times faster than the median. Between 1974 and 2018 the average grew 3.5 times faster. Shared prosperity, anyone?

  4. Antonio Says:

    ’Only a good, deep recession can restore profitability by sharply reducing the costs of fixed assets and new investments for those businesses that survive’ ’
    Yes, this sounds like the creativa creative destruction ’of Joseph Schumpeter. It is a very striking concept, fun but … false. What deep recessions have restored the profitability of companies in the history of capitalism? Which companies have restored their profitability? All, some, or just the monopolists? The most correct and real thing seems to be to say that the current economic slowdown will continue for 15 to 30 years, with nineteenth-century growth rates at the annual maximum of 1.5 annual and with extreme inequality. It is a pure capitalist growth without the engine of state growth (companies, expenditure, state investment) and is a growth concentrated only on monopoly companies (FAANGS, Dow Jones, Cac40, Ibex35, etc.). All this slowly and smoothly without sudden changes, except for exceptions due to financial and active bubbles or sudden and unexpected rise in commodity prices. Yes, true, the surviving companies (the monopolists) seize the low-cost assets and the clients and markets of the rest of the companies, but that DOES EVERY DAY, without the need for any deep recession! only the Law of Concentration of Capital in operation. I’m afraid.
    Regards

  5. Tim Rourke Says:

    What I am curious about is why consumer demand stays high. tr

  6. The Rum Uncle Says:

    One note: the 2008 recession did not occur under Obama. Bush W. was the President then. The election took place in 2008 but Obama’s inauguration took place in 2009.

    • gonzogil Says:

      That is very much true. He just did not think it was genocidal enough so he proceeded to wack people out by kicking them out of their homes and exposing them to the elements (summer, or, winter) then you have to take into acct how many of those people had chronic diseases. That is just one of the daggers he traversed the body politic with. The second one was with the re-structuring of the auto industry. He was only willing to provide credit for it if and only if the next generation of workers would be further rationed out of existence. Multiple daggers for multiple money. He knew how vulnerable they were since he had been an organizer of some form or another. At least that is how he was advertised to the population. His buddy Axelrod did get an award for best b.s. campaign of 2008 I think.

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