Unbeknownst to the President-elect, capitalist economies have built-in economic cycles with highs (peaks) and lows (troughs). That's just the way capitalism works. The National Bureau of Economic Research (NBER) uses changes in gross domestic product, or GDP, to measure the length of economic cycles from trough to trough, or peak to peak. On the average, since the 1950s U.S. economic cycles have lasted about five and a half years. But there is wide variation. In the early 1980s the economy went from peak to peak in just eighteen months. In the 1990s the cycle lasted almost ten years. Economic woes bringing down the Bush administration in 1992 ("It's the economy, stupid!") followed by an economic boom that lasted through the end of the Clinton years when a "dot.com" investment bubble burst.
Highs are generally marked by prosperity, growth, and low unemployment. During lows there is business stagnation and workers get laid-off. In the United States the federal government tries to use interest rates, tax policy, and government spending to keep the economy in balance without extreme highs and lows. This does not always work, especially when a "bubble" economy leads to unjustified investor exuberance and expansion. Problems emerge when the highs are out of control. Eventually a "bubble" bursts and an economy is stuck in a deep and prolonged low, either a recession or depression.
The latest economic uptick started in June 2009, following the Great Recession caused by a toxic mortgage/unregulated banking bubble. This cycle has now lasted for seven and a half years, a long time by economic standards. If we start measuring the cycle from the 2007-2008 "trough,'" it is even longer and the recovery was fragile. If this pattern holds, the economy is due for a major downturn during the Trump years, and signals indicate it will be a bad one, global, and probably worse than 2007-2008. I am worried because Trump and his "advisors" rely on bluster rather than policy and seem to have little understanding of or commitment to learning how anything works.
Recent economic news makes me especially nervous. On December 9, 2016 the New York Times reported "Major Indexes Ride Surge to Record Highs Yet Again." That was on Thursday. On morning Friday, the Times website reported that indexes continued to climb. The record-making price climb was led by major banks, hoping for an end to regulation, and energy companies, banking on increased prices and the freedom to rape the environment without restrictions. These were speculative increases, investor gambling, not backed by any analysis or proof of economic expansion. In the 1990s, Federal Reserve Chairman Alan Greenspan called this type of investment "irrational exuberance" because it "escalated asset values" without evidence that companies were going to be profitable - then the dot.com bubble burst.
One reason for the stock market surge, the Standard and Poor's index tripled between March 2009 and March 2016, while the Dow Jones Industrial index almost doubled between 2012 and today, is that since 2009 interest rates have been almost zero. Investors put money in the stock market because it is the only place to make money. In addition, companies are able to borrow from banks at low interest and they can merge or buy up their own stock, inflating market rates, figuring they can always use profits to pay back loans. But this is essentially a Ponzi scheme. When the bough breaks, someone is going to be left holding greatly diminished or even worthless stock.
Wall Street insiders predict a Trump stock market boom in 2017. They have predicted a "bullish" market every year since 2000. But during this period the Standard & Poor's stock index declined in 2000, 2001, 2002, 2008 and 2015. In 2008 the insider forecast was for a market increase of over 10%, but the S.&P. index fell by almost 40%.
Richard Wolff, an economist who teaches at New School University in New York City, jokes that he and his leftist colleagues have "predicted ten of the last four recessions," including a number that never took place. Wolff argues that despite its inequities and periodic crises capitalism has proven to be resourceful. But he also believes that the current situation is the "worst condition of American capitalism" he has ever seen or expected to see. I think he is right.
Given the economic business cycle and other indicators, the bough will break soon. "Irrational exuberance" has contributed to the increased value of the U.S. dollar overseas. That may be good for foreign travel, but it will be horrible for domestic businesses that will be unable to sell overseas because their products and services are too expensive.
But an even bigger problem caused by the rise in the value of the dollar is foreign companies and countries that will be unable to repay debts. That could be the pin that pricks the bubble. Poorer countries and corporations based in the Third World have been borrowing trillions of interest free dollars for more than a decade and they have to pay back in dollars. But as the value of their money declines, they face a huge spike in servicing costs and an elevated debt that they can never pay back. The Mexican peso has declined 10% against the dollar and the Turkish lira by 17% this year alone. The Indian rupee fell to a record low and its stocks declined as global financial funds fled Indian assets. In Brazil, on December 1, the U.S. dollar sold at its highest rate in six months and the São Paulo Stock Exchange had its steepest decline in almost a year.
All of this is happening while four long-term mega-trends, each foreboding in its own right, threaten economic viability.
1. Economic inequality in the United States and around the world continues to grow. Studies by economists Thomas Piketty, Emmanual Saez, and Gabriel Zucman show that since 1980, the share of total income going to the top 1 percent of earners in the United States has doubled. Wages, however, have barely changed over the last thirty years so the bottom half's share of national wealth, the working-class and middle class, has narrowed. They argue that rather than reflecting conditions in a mature modern economy, an economic gap this size makes the United States look like some of the world's poorest countries.
2. Climate change, denied by Trump and his pick as head of the Environmental Protection Administration, will be economically devastating. Health care costs go up as people, especially the old and young, face weather extremes. Infrastructure, especially in coastal cities will be destroyed by storm surges and rising sea levels. Drought and flooding will undermine agricultural production.
Donald Trump swears he can bring industrial jobs back to the United States, but he ignores the last two mega-trends - robotics and overcapacity.
3. Trump promises good jobs when factory production returns to the United States, but he misses a big concern - robotics. The World Economic Forum predicts a "Fourth Industrial Revolution" is the works that will be characterized by unprecedented "developments in genetics, artificial intelligence, robotics, nanotechnology, 3D printing, and biotechnology." This would mean millions of skilled and unskilled workers being replaced by machines. A recent study estimates that about 13% of U.S, manufacturing job losses were caused by foreign competition, the other 87% by enhanced productivity as a result of automation. The global capitalist firm McKinsey & Company believes that existing technologies could automate 45% of the activities people are paid to perform. They estimate about 60% of all occupations will be affected, including jobs like welding and soldering on assembly lines, food preparation, and packaging, and that in some areas, like retail sales, half of the jobs will be eliminated.
4. The world is suffering from a crisis of overcapacity similar to the one in the late 1920s. Industry is not going to expand because factories can already produce more cars, steel, flat-screen televisions, and other consumer products than can be profitably sold or even used. Stanford history professor Walter Scheidel argues that the only thing that has reversed this trend in the past has been devastating wars that destroyed factories and inventory, clearly not a preferred economic policy.
Meanwhile Republicans in the House and Senate, led by their economic guru Paul Ryan, are committed to budget cuts, tax reductions, and reducing deficits, the exact wrong solutions championed by Herbert Hoover in 1929 that prolonged the Great Depression of the 1930s. Trump's America First economic nationalism will also worsen the situation as it makes international cooperation to solve a global economic downturn virtually impossible.
It is going to be a difficult ride, especially, and as always, for working people. Let's hope Trump and the Republicans take the blame and the U.S. and world economies recover quickly on the next uptick.
Happy New Year everyone!