Gary Shilling’s Blog

Trump could start a massive fiscal stimulus bill

Most forecasters believe the Trump administration’s forecasts of 3 percent to 3.5 percent annual real gross domestic product growth in the next decade are far too rosy. The nonpartisan Congressional Budget Office foresees 1.9 percent per year between 2021 and 2027, and the Federal Reserve expects 1.8 percent annually in the long run. 

These differences aren’t trivial. Growth at 3.5 percent per year rather than 1.8 percent would make the economy 18 percent bigger over a decade. It also would involve reducing federal budget deficits by cutting spending on programs such as food stamps and unemployment insurance while boosting taxable personal and corporate incomes. 

Pessimists point to the ironclad law of economic growth: Annual increases in employment plus productivity growth equal yearly gains in economic output. Aging and retiring postwar babies, as well as President Donald Trump’s anti-immigration policies, will severely limit labor force growth, they maintain. And output per hour worked, which gained about 2.5 percent a year in earlier decades, has risen just 0.5 percent annually in the 2010-2016 years. 

Some blame weak capital spending while others foresee no big productivity-soaked new technologies coming along to propel productivity because everything worth inventing is extant. Malthus is alive and well. At the opposite end of the spectrum are those who believe robots will replace people to the point that there will be too few earners to buy the nation’s output. 

I disagree. First of all, consider the bias of most forecasters toward slow growth forever. Since this business expansion started in mid-2009, real GDP growth has averaged a mere 2.1 percent despite the Federal Reserve’s cuts in short-term interest rates to zero and huge quantitative easing. So the tendency of most is to assume that this pattern will last indefinitely and they select evidence to substantiate that view. It’s the easiest forecast to sell as forecasters’ audiences readily agree because it matches their ongoing experience. 

Still, the ironclad law of economic growth is actually quite pliable. Real GDP annual growth of 3.5 percent would occur with 2.5 percent yearly growth in productivity and 1 percent rises in employment, the historic numbers. True, with low fertility rates, the Census Bureau sees the U.S. population rising just 0.2 percent a year by 2026, even with net immigration of 1.3 million annually over the next decade. 

Nevertheless, the labor participation rate -- the percentage of the population over 16 that is employed or actively looking for work -- had plummeted to 62.9 percent in January from the 67.3 percent peak 17 years earlier. So 4.4 percent of the potential workforce, or 11.3 million people, have departed. About 60 percent were retiring postwar babies, but many are returning or staying in jobs past normal retirement ages because their health is better than their predecessors’ and because they need the income. Postwar babies have been notoriously poor savers throughout their lives. The participation rates of those over 65 are actually rising, not falling, as is normally true for seniors. 

Also increasingly looking for work are youths who stayed in school during the dark Great Recession years and are now better educated and attracted by expanding job openings. In addition, skills to meet available jobs are being provided by apprenticeship programs that combine two-year college degrees with on-the-job training. German manufacturers brought this system with them to their factories in the U.S. Southwest, and it is increasingly being emulated by U.S. firms. 

Trump’s threats of mass deportation of undocumented immigrants have been scaled back. They now target those with criminal records and other suspects. And with cooler heads in Congress, U.S. immigration policy may end up mirroring Canada’s with a point system aimed at admitting those with the skills this country needs. 

Trump’s planned deregulation and lower corporate tax rates may spur capital spending, but the correlation between the growth in capital expenditures and productivity gains is low, sometimes negative. More machines alone don’t spur efficiency. More important, productivity-enhancing new technologies grow explosively, but since they start from essentially zero, it takes decades before they move the productivity needle significantly. Aside from those yet to be developed, today’s well-known technologies such as robotics, additive manufacturing, biotech and self-driving vehicles are no doubt still in their infancy. 

The argument that protectionism inhibits economic growth is also suspect. Sure, eras of rapid global economic growth are also periods of strong foreign trade advances, but do trade gains stimulate economic activity or the reverse? You can’t prove causality with statistics. If you beat a drum every time there is a total eclipse of the sun, it will go away. No causality, but 100 percent correlation. 

Also questionable is the robots-will-eliminate-workers theory. A recent McKinsey study found only 5 percent of 800 occupations and 2,000 job tasks are likely to be entirely automated. Instead, half of current jobs will be changed significantly, forcing employees to adjust. At the same time, automation may hike global productivity by 0.8 percent to 1.4 percent per year during the next half century. 

The catalyst for the return to rapid economic growth will, no doubt, be a huge fiscal stimulus program. Voters who are mad as hell after a decade or more of no growth in real incomes elected Trump and the Republican Congress, and politicians will respond. It will take two or three years to come to fruition, but look for huge infrastructure outlays and large increases in military spending.

Stocks don’t normally discount that far ahead, but maybe that’s what leaping equities are anticipating, despite all the uncertainty in Washington, the nation and, indeed, the world.

 DYI