Low Unemployment and Wage Growth
I hear and read about many politicians, economists and business people mention how great our economy is doing. Stocks have fluctuated lately but sometimes the market overall continues to close upward and the unemployment rate is at 3.7%. What's not to like?
I'm not saying the economy is bad or lousy, that would be a silly thing to say. An unemployment rate of under 4 percent is an accomplishment (not withstanding those who have given up looking for work and are not included in this rate). However, I think it's important to 'peel the onion' and determine how the economy is doing for all Americans.
Average wages over the last few years is around 3 percent. That's certainly good news but with raising health care and child care costs, raising wages are blunted. According to the Kaiser Family Fund, over the last 10 years, average health care spending by families with large employer health plans has grown twice as fast as wages. So yes, it's great that wages are increasing but at the same time, health care costs for many Americans greatly offset wage increases.
In May of this year, according to a Federal Reserve survey, almost 40% of American adults would not be able to cover a $400 emergency with cash. What does that say about the current economy? This is a large portion of Americans living paycheck to paycheck. Is this not a major concern by politicians considering the unemployment rate has been historically low over the last few years and at the same time a significant portion of Americans still have limited cash for emergencies. Could we blame the lack of significant wage growth or overall low wages for a portion of the population on their inability to not have excess cash on hand? Or health care costs rising at a higher rate than wage growth? Or attribute much of this to personal fiscal irresponsibility?
Tax Cuts of 2017 and Stock Market Success
Late in '17, Donald J. Trump signed the Tax Cuts and Jobs Act. It cut individual income tax rates, doubled the standard deduction and eliminated personal exemptions. Some economists said this has helped the economy, especially the stock market and GDP, however, this may be short-lived. The latest economic numbers for the first two quarters of '19 has our GDP at 2.6 percent. If this continues, one could argue that borrowing 1.5 trillion through the Tax Cuts and Jobs Act was not money well spent. This policy added so much money to the debt and there's much debate saying adding much to the deficit will only temporarily stimulate the economy.
As of August 26, 2019, the stock market, however volatile, is doing fine, partly to the tax cut of 2017. Let's kick the tires and realize the stock market has done well for the last 10 years or so. DJT claims the market has taken off since he became president in January of '17. It's as though once DJT was in office, the market just mysteriously shot up like a rocket. How do our two last presidents measure up between their inauguration and May 31st of their third year in office?
Under Obama's first 2 and 1/2 years, the S&P 500 grew by 56.4%. The Dow was up 50.6% and the Nasdaq, 92.9%. (One needs to be transparent by stating when Obama first came into office, the stock market was close to all-time lows so these numbers may be a little bit inflated but overall, the market under Obama showed steady improvements during his eight-year tenure.) For the same period for Trump, increases of 21.4% for the S&P 500, 25.2% for the Dow, and 34.2% for Nasdaq.
One other thing, some Trump based economists brag about the stock market is at all-time highs. That's true but needs additional context. There's no question what preceded the all-time stock market was the success of the Obama fiscal policies. In other words, there were many instances during the Obama administration where the S&P or Nasdaq also achieved all-time highs. Interesting that DJT fails to mention that fact. Anyway, DJT inherited a fairly strong economy which puts him in a good position to boast every time unemployment decreases or increases in the stock market.
There's no question these tax cuts helped all the financial markets but again, these cuts add to the national debt. However, 1/3rd of investors in the US stock market are foreigners. So it can be said, borrowing money that future generations of Americans have to deal with benefit both American and wealthier foreign investors.
Should the Feds Have Cut Interest Rates?
The Commerce Department reported that gross domestic product in the April-June quarter slowed to 2.1 percent from the first three months of the year, down sharply from 3.1 percent growth in the first quarter. Perhaps this is why the Federal Reserve lowered interest rates recently when unemployment is at 3.7 percent.
However, was the rate cut done too soon? Wouldn't waiting another quarter or two before cutting rates be a more prudent policy? How much pressure did DJT put on Fed Chairman Jerome Powell to help stimulate the economy? How will the Chairman react next year if the economy slows down before the election when pressured by President Trump?
In a strong economy, fiscally responsible politicians and economists recommend looking at balancing the budget instead of lowering interest rates. With full employment and decent GDP growth, the budget deficit could be at least half of what it is now. In terms of the deficit, it may reach $960 billion for 2019 fiscal year (ends September 30). Also, next year's deficit may exceed $1 trillion. Again, some say interest rate cuts with a good economy is fiscally irresponsible. With a forthcoming recession in the future, having interest rates as high a possibility would be a useful tool to help stimulate the economy when it is desperately needed, not when there's full employment and decent GDP growth.
As a reminder and during Trump's Presidential campaign, he had promised 3 percent GDP growth or greater. Growth for his 2.5 years of his administration includes: 2.4 percent for 2017, 2.9 percent in 2018 (tax cut was done in late '17), and 2.6 percent so far in 2019. Even while adding much debt to the deficit, he's not yet achieved 3 percent or greater GDP. Again, our president would rather blame the Federal Reserve Chairman or the Chinese instead of taking responsibility for the economy. If Trump wants to generate respectable GDP growth without additional tax cuts, there are several suggestions.
Work with Congress on making student loans less burdensome for students, rejoining the Trans-Pacific Partnership (TPP) (which would have given the US more leverage when dealing with China), reform our health care system to make it more affordable, implement energy taxes to help build our renewable energy infrastructure, and stop the tariff threats with China and Europe (cut a deal).