Not too long ago, the Dow Jones Industrial Average (an index of a number of benchmark stocks, often used as a measure of the overall health of the stock market) hit the landmark number of 20,000, its highest peak ever. In the few weeks since it has continually closed at higher and higher records. This is due largely in part to the election of Donald Trump, who has promised tax breaks and deregulation in an effort to grow the economy to his promised 4% GDP growth, the type of economics Reagan Republicans have been pushing for quite a while now.
A little background: Ronald Reagan introduced “Reaganomics” to the world in the 1980s. The basic idea is that by cutting taxes and deregulating, you free the market to grow on its own outside of government control. This is also referred to as “supply side economics” (and also “trickle down economics” by its detractors) because the theory is that policies that increase supply (supply of capital, supply of goods and services, etc.) are the most effective at driving economic growth.
On the other hand, the prevailing theory on the left is Keynesian economics. This is a theory opposite to supply side economics in that Keynesians believe that the most effective policies to drive economic growth focus on the demand side of the equation, especially in economic recessions. This is why Keynesians love policies like stimulus bills that put capital in the hands of consumers, which is believed to drive growth because the more money in your pocket, the more likely you are to spend it on a good or service.
It seems, with President Trump, the theory is that a federal government under Obama and the Democrats have hamstrung economic recovery with too much regulation – environmental regulation, banking regulation, etc. In order to reach his target 4% GDP growth, Trump is going the path of supply side economics, which Wall Street was swooning over even before any policies were enacted.
Reagan inherited an economy very different from the economy inherited by Trump. Fed interest rates were around 20%, with rampant inflation, relatively high unemployment numbers, and an energy crisis. Compare that to today, where we have quite the opposite situation – historically low interest rates, low inflation, low unemployment. Reagan’s policies worked (arguably) at the time under a totally different set of circumstances – they increased supply when supply was in trouble. Neither supply side or Keynesian economics work universally – they are both responses to specific economic conditions. This is why the stimulus bills under Obama were such a success and pulled the world out of the clutches of depression – it bolstered demand when demand was failing.
Dow hitting record highs is exciting, but also a little frightening. The economy has been growing, however slowly, but Wall Street is somehow going wild. It is a largely psychological boom, with very little change in the real market, in people’s everyday lives, to back it up. GDP growth has disappointed, real incomes have stayed stagnant, real unemployment (which accounts for people who have stopped looking for work) is improving but still high, and good jobs remain relatively weak. Demand is still very much the area most in need of improvement today, and increasing supply at this point is not going to have the same effect it had in the 80s. Deregulation is going to suck more growth towards the top 1% while simultaneously destabilizing the market by taking away key laws aimed at preventing another crash, making the economy more volatile and more recession-prone.
Even worse than this, however, are the huge economic problems that are being mostly ignored. The Euro is in trouble; most of the European Union is still in the process of quantitative easing (inflating the money supply to mask debt). China is dealing with a real estate bubble. Domestic factors like student loan debt and a retiring baby boomer generation are trends that are slowing growth to a halt. America has a stronger case to ride out another recession than the rest of the world, but we are not (and cannot be, regardless of how much Trump wants to try) immune to the factors at play around the globe.
If we want economic growth in 2017 and beyond, real economic growth, the type that improves the lives of everybody involved – we need to let the market run free with 21st century propellers of growth. Energy independence, automation and robotics, free trade, medical and retirement care for our aging population – these all represent massive growth opportunities if taken on responsibly. A long overdue investment in infrastructure – not just repairing but modernizing our outdated infrastructure to meet new demands – is one area where the Trump administration gives me hope that it can put us on the right track, at least economically speaking. Most of all though, growth has to come from innovation and entrepreneurship, from creating value out of the power of the mind.
What we are seeing right now in the DJIA is not real growth, it is Wall Street profits. The fact that President Trump wants to reject transition in a hope to protect 20th century jobs, while simultaneously rubber stamping a Republican supply side economic plan, is not only irresponsible but could be a recipe for disaster in the coming years. Now is not the time.