Better Economic Growth Ahead?

Popular Economics Weekly

Real gross domestic product increased at an annual rate of 4.1 percent in the second quarter of 2018, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.2 percent (revised).

All economic cylinders were firing, including a huge 4 percent jump in consumer spending and net 1.1 percent jump in exports. But costs are soaring as well, up 3 percent in the GDP Price Index that measures inflation. Costs are rising because of the tariff wars.  Still, it’s good to see growth approaching the 2014 high mark of 5 percent quarterly economic growth—before the budget wars when Republicans limited government spending across the board (the sequester) and new investment.

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Graph: BEA

We can only maintain such growth if employment continues to grow; which might happen this year. But it means we can’t have trade wars that cause sharp price rises and interrupt international supply chains. President Trump now says we “love each other” after the latest meeting with European Commission President Jean-Claude Juncker, but they made vague promises. The EU will now buy some of the excess in US soybeans due to China’s cutbacks, and work towards gradually eliminating tariffs on all non-auto industrial goods..

This is a big deal for several reasons, as spelled out in their joint press release: “The United States and the European Union together count more than 830 million citizens and more than 50 percent of global GDP. If we team up, we can make our planet a better, more secure, and more prosperous place.

“Already today, the United States and the European Union have a $1 trillion bilateral trade relationship – the largest economic relationship in the world. We want to further strengthen this trade relationship to the benefit of all American and European citizens.”

They agreed to work together toward zero tariffs, zero non-tariff barriers, and zero subsidies on non-auto industrial goods. They will also work to reduce barriers and increase trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans.

But they have to also agree to unite against China’s trade barriers and technology thefts, instead of negotiating bilaterally with China, Russia, and even Iran, where National Security Advisor and pro-Iran war hawk John Bolton seems to want regime change.

What could derail higher growth ahead is the inflation problem. Prices rose sharply in the GDP Price Index, as the US depends heavily on tariff-affected imports to supply its manufacturing sector in particular.

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Graph: Econoday

And now we have the problem of declining government revenues that have cut corporate tax revenues by one-third due to the recent tax cuts . This happened last during the Great Recession. Shrinking government spending won’t fix airports, highways, bridges, not to speak of the aged energy grid that Russia has been hacking into of late.

Let us hope the next Congress has the sense to stop cutting taxes (and health care benefits) when corporations use the tax savings to buy back their stock and increase stockholder dividends, rather than invest in new plants and equipment. The only way to increase productivity and our standard of living when the private sector won’t is to use tax dollars that serve the public good, rather than the private good of the wealthiest among US.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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