The past few days have seen historic drops in the stock market due to rising fears over the impact of the coronavirus on the world economy. It appears that the fears associated with this potential pandemic are not overstated, with the CDC warning that it’s just a matter of time before it affects the United States.
Trump, for his part, rather than playing the role of leader that we would expect when facing such a crisis, has taken to blaming the media and Democrats for overblowing the risk. Reportedly, these stock market drops, the newly inverted yield curve, and the potential for a recession in this election year have him and his allies deeply worried.
All the attention directed at the economic impact of the coronavirus misses a critical point. Despite claims to the contrary focusing on the low unemployment rate and high consumer confidence, by a number of measures, the U.S. economy isn’t actually doing so well.
Consider the following. Trump promised us 4, 5 or even 6 percent economic growth. Such growth would be extremely impressive considering the fact that in high-growth period of the 1990s, the highest annual GDP growth we experienced was 4.88 in 1998. Since Trump has been president, GDP has grown 2.8 percent in 2017, 2.52 percent in 2018, and 2.32 percent in 2019. And even before the coronavirus threat appeared, economists were forecasting an anemic 1.8 percent growth rate for 2020. So much for promises made, promises kept.
The centerpiece of Trump’s economic policy has been the massive tax cut of 2017. Trump sold it to us arguing that this tax cut would “be rocket fuel for our economy.” Upon passing the tax cuts, Senate Majority Leader Mitch McConnell crowed “after eight straight years of slow growth and underperformance, America is ready to take off.” Treasury Secretary Steven Mnuchin promised that it “will pay for itself with economic growth.”
None of these promises have come true. Economic growth has not topped even 3 percent since it passed, and business investment is actually down. At the same time, the budget deficit has exploded, topping $1 trillion. So the tax cuts were a bust, and that’s even without mentioning their impact upon income inequality.
Trump also promised to revitalize manufacturing. That too has not happened. In fact, manufacturing is in a recession, with the hardest-hit states being the key swing industrial states like Pennsylvania, Ohio, Wisconsin, and my home state of Michigan.
The Institute of Supply Management’s manufacturing purchasing managers’ index logged its lowest level since June 2009 at 47.2, compared with the consensus forecast of 49. It stood at 48.1 in November. In December, it was 47.8. Any number below 50 denotes a contraction. In January it finally topped 50, but just barely at 50.8. So much for a manufacturing renaissance.
These data are actually just symptoms of a much more startling long-term issue with our economy: it is not as dynamic as it used to be. America’s strength has been its entrepreneurial culture. But since the early 1980s, when conservatives and neo-liberals started reorienting our economy to benefit big business, small business activity has been steadily dropping. The rate of decrease has accelerated since the Great Recession of 2008. In 2015, 414,000 new businesses were formed. Sounds like a lot until you realize that in 2006, 558,000 new businesses were formed, and we are a bigger country since then. This is something we should be worried about long term.
This change is due to a policy we have implemented over the past few decades: less anti-trust enforcement. As we have hollowed out our anti-trust laws, we have seen the rise of powerful big businesses. The result has been bigger businesses with the power to stomp out potential new competitors and hold down wages. Even if Amazon.com and Google seem to provide us services at low cost, their long-term cost to the economy in lower wages and reduced entrepreneurship far outweigh any of their advantages.
Trump’s pro-big business policies have only helped accelerate this trend. In fact, since Trump has been in office, the Inc Entrepreneurship Index, which measures the health of the start-up economy, has been declining steadily. In fact, that index has been consistently below what it was while Obama was president.
So why are so many convinced that the economy is doing well? After all, according to indices, consumer confidence is currently at its highest level since the Recession. What has kept the economy humming despite all these headwinds has been government spending. Since Trump has been in office, he and his supposed fiscal conservatives have been spending government funds like drunken sailors. And you can’t blame Democrats for this. After all, for most of Trump’s presidency, Republicans controlled both houses of Congress. At the same time as they have cut taxes and thus reduced revenues, they have dramatically increased spending, and that’s why the deficit has climbed so high despite the strong economy.
As the economist Maynard Keynes explained, government spending can help fuel a sputtering economy. The irony is that during Obama’s tenure, in the wake of the worst economic crisis since the Great Depression, Republicans worked hard to stop him from spending money to get the economy back on track. As soon as Trump came into office, they abandoned their supposed fiscal conservatism. The result has been a government spending spree aimed at bolstering up an otherwise weak economy.
Republicans love to crow about how well the economy’s doing. But fundamentally, if it were not for the big government spending the Republicans have delivered, the economy would be doing significantly worse than when Obama was in office. Indeed, even with all that fiscal stimulus, Trump’s performance on the economy is no better than Obama’s. In some respects, then, the correction the stock market is going through as a result of the coronavirus scare might reflect more than just a passing phase.