The economy in the United States is enormous; the total value of all the goods and services produced last year was approximately $18.5 trillion. Over the past eight years, growth has averaged 2.2% per year. Is it possible for such a huge economy to grow at a meaningfully higher, long-term rate? What drives growth? Are those forces controllable?
How much do policy changes really matter?
The answer is “yes”— even at this tremendous size, the U.S. economy could still grow at a higher, long-term rate, greater than 2.2%. But, while government policy may help or hurt the chances of reaching a higher growth rate, it is unlikely that policy will play the deciding role that politicians, the media or many citizens think it will.
In the end, circumstances beyond the control of policymakers, usually centered around great technological change, tend to overwhelm policy changes. In economic terms, what meaningfully contributes to economic growth is productivity growth — in other words, the ability of the economy to produce more from the same amount of time, effort, energy and investment is an important component to achieving a higher growth rate.
Clinton, Bush and Obama
A quick look back at recent administrations helps make the case. When Bill Clinton became president in 1993 — and pushed through increases on personal and corporate tax rates, as well as an increase in gas taxes — who knew that the world was on the cusp of an amazing technological revolution, with the breakthroughs of computing power, the speed of telecommunications power through fiber optics and the internet as an ubiquitous tool for consumers and businesses. The internet boom seemed to overwhelm policy and likely contributed more to the boost in gross domestic product (GDP) than tinkering with the tax code.
By the time George W. Bush became president in 2001, the U.S. economy already felt the indigestion of over-investment from the internet boom. His initiatives to cut taxes could not stop the bursting of the internet bubble; and then, of course, the shock of the September 11 attacks overwhelmed the economic stimulus that had been enacted previously.
While we normally associate innovation with producing positive change, there is the case that the decades of innovation in the financial sector, to some degree, contributed to the crisis of 2008. The securitization of the mortgage market, and the ever-more complex securities that were created around the mortgage market, led banks to buy, sell and hold securities with great amounts of borrowed capital. Very few understood the securities and the risks they carried, including policymakers and regulators; the unraveling of it all brought us to the brink of a great depression.
The massive bailout, which started under the Bush administration, the fiscal stimulus under Barack Obama and then the Federal Reserve’s unprecedented efforts to keep interest rates very, very low helped stop the economic free fall; however, the recovery, while solid and steady, has not been super robust. Obamacare, Dodd-Frank financial regulation and other regulations may be reasons why. Meanwhile, there was a boom that took place in parts of the country over the past decade that helped bring unemployment down after the crisis — in oil and gas, something few, if any, in the White House, Congress or the Federal Reserve saw coming.
Trump and Productivity Growth
Here we are with a new administration that, on the surface, is unconventional — refreshing to many, but also startling to many. Underneath the rhetoric and showmanship is policy. The economic policy looks to be centered around tax reform and tax cuts; deregulation; tighter trade and immigration policies; infrastructure investment; and easier repatriation of capital held by U.S. companies overseas.
On balance, the markets have welcomed the potential policy changes. Now comes the harder part of getting legislation passed and trade deals negotiated, and U.S. markets may now churn along with that process in the coming months. We’ll see. Longer-term history tells us that the bigger potential boost to U.S. economic growth will not come directly from policy changes; rather great, positive change in economic growth comes from productivity growth, over which policymakers have little control.
There will likely be another surge in productivity; predicting how and when it comes is very hard to do, but it is fun to think about what will drive the surge. We can now start to see the impact of artificial intelligence. One robotics expert at the University of California, San Diego recently prophesized that, “…kids born today will never get to drive a car.” Will the shift to autonomous vehicles be it? In the meantime, a steady and balanced approach to investing stays in force, and hopefully the guardrails of policy do more to keep economic growth on track than not.
Though it's uncertain what the future holds, there's a chance that new policies could have an impact on businesses and business owners moving forward. Visit the Business category to stay abreast of changes coming out of the new administration, plus other topics that are important to you and the long-term financial health of your organization.
