A pessimistic atmosphere was on offer at the meeting of the American Economic Association at the beginning of the year. According to The New York Times, most participants warned of the negative consequences of the commercial war unleashed by President Donald Trump, growing fiscal deficits and the inability of central banks to correct a new recession.
The expansion of the U.S. economy is one of the longest in history, now finishing its 11th year. The problem is that it rests on precarious foundations: excess public spending, low tax collection and interest rates that are too low. When the end of the expansion comes, which must happen at some point, there will be no fiscal or monetary ammunition to confront it, resulting in a painful adjustment. The World Bank forecasts growth below 2% in 2020 and 2021 and describes global expansion as fragile.
There are growing risks of a deteriorating economy due to the escalation of trade wars and the brake on economic activity in the United States and Europe, as well as the possibility of financial crises in China and India, which have fueled their expansions with increasing amounts of credit. Although there has been a truce between the United States and China, the opposite is happening with France, which increased its taxes against large American technology companies, to which Trump responded with tariffs on its fashion, wine and cheese industries, threatening to extend them to the European Union. The once buoyant German industry has been contracting for four months; more recently, manufacturing activity in the United States also has declined.
It is clear that the tax incentives of the 2017 reform, proclaimed by Trump to be a turbocharger of private investment, have dissipated, and there is no evidence of any significant increase in investment, nor has the increase in public spending — financed with debt, which has already reached $1 billion — been able to prevent the slowdown in the growth of the economy.
The serious fact is that United States productivity has deteriorated, while the rise in wages is beginning to bite into profits. The repression of immigration has contributed to this result: it contracts the supply of unskilled, qualified and professional work, which again affects productivity. To top it off, destructive austerity, as Paul Krugman called it, has seriously damaged the transportation and energy infrastructure. The distrust in science by the extreme right has also triggered the decline in public investment in research and development.
One of the notable debates in Congress was between Larry Summers, former secretary of the treasury under Barack Obama, and N. Gregory Mankiw, conservative author of the very popular text, “Principles of Economics.” Summers said that a substantial increase in public spending was necessary, regardless of the increase in the fiscal deficit, while Mankiw has been warning since 2008 that public spending is very dangerous, repeating that the high level of accumulated debt will paralyze growth.
The phrase, “The definition of insanity is doing something over and over again and expecting a different result” is attributed to Albert Einstein.* The foolishness of economists shows that they affirm the same thing for many years, hoping that it will finally be fulfilled.
*Translator’s note: It is unclear that Einstein was the true author of this statement.
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