Alex Rodriguez getting paid more than $20-million (U.S.) by the New York Yankees to basically do nothing through the 2017 Major League Baseball season: That pretty much sums up what's wrong with America.
As if three consecutive quarters of declining productivity, something that we haven't seen since the tail end of the miserable Jimmy Carter era, back in 1979, isn't ominous enough on its own. (A recession came exactly a year later.)
So what is Donald Trump's response to the country's current overall economic malaise? Well, the Republican presidential nominee revealed his fiscal plan on Monday in Detroit, where he has a steep hill to climb, considering that he is behind in Michigan by nine percentage points in the latest polls.
The plan has received a "thumbs up" in some circles – but not very many – and for good reason.
The plan to cut the U.S. corporate tax rate to 15 per cent from 35 per cent will restore the country's global competitiveness on this score, but the reality is that, given the myriad of tax breaks, the effective U.S. tax rate is really 18 per cent. What would have worked better is a lower rate and a broadening of the base, as Canada did in the 1990s.
The intention to divide personal tax rates into three buckets, with top rates of 12 per cent, 25 per cent and 33 per cent (down from the top rate of 39.6 per cent) will certainly bolster disposable incomes, but only by 0.2 per cent for the middle class and more than 5 per cent for the top income earners.
If you want to get a big bang from an aggregate demand standpoint, what you really want to do is lift incomes for the lower- and middle-income earners whose spending propensities are far higher. Then again, Mr. Trump's economics team hardly has any economists on it – three out of 13. And our best estimate of the median net worth of this group of advisers is a cool $1-billion and the average in excess of $2-billion. (It's nice to see that the Donald truly is a man of the people.)
A special lower tax rate of 10 per cent on retained earnings held abroad could mean at least $100-billion being repatriated home. That makes good sense, but whether it spins the dial for capital spending remains to be seen – it's not as if the corporate sector has been cash-starved this cycle. It's just that businesses find it more to their advantage with interest rates where they are to buy back their stock than deploy capital into the real economy. It's not really much more complicated than that.
A new tax deduction for child care is pure populism, but again, it will help underpin cash flow for families, too.
His promise to roll back energy regulations is a positive from any macroeconomic standpoint, to be sure, but with gasoline prices approaching 14-year lows of barely more than $2 a gallon, it can hardly be argued that costly energy is an impediment to growth.
The Trump package is being hailed as a Reaganesque budgetary plan, as commentator Larry Kudlow said over and over again on CNBC.
But here is the problem: The government debt-to-GDP ratio in 1980 when Ronald Reagan took over the Oval Office was 25 per cent; today, it is 75 per cent. When Mr. Reagan became U.S. president in 1980, the first of the baby boomers were turning 34, not 70.
The Washington-based Tax Foundation concludes that this fiscal package will cost $1-trillion annually for the next 10 years. This is what is otherwise known as fiscal suicide, especially considering the projected rise in the dependency ratio in future years and how the greying of the population is going to be exerting intense strains on fiscal policymakers for decades to come.
No doubt there will be some positive multiplier effects, but the view that this is a plan that pays for itself or largely pays for itself through the extra economic growth that will benefit revenue coffers is way off base and has no basis in fact.
Preventing runaway fiscal debt in the face of daunting demographics with all this stimulus would require significant spending cuts – but given that about 70 per cent of all federal spending is on social security, defence, veterans' benefits, Medicare and debt-service costs, where is the restraint on the spending side going to come from to prevent destabilizing and intractable deficits?
On top of that, the pledge to reinstate the Glass-Steagall Act (which separated banks' commercial and investment operations) would end up impairing U.S. competitiveness from a global banking standpoint, unless other countries also followed suit.
And the threat to either raise tariffs or renegotiate trade treaties is dangerous and irresponsible, and will blunt whatever positive growth impact will come from the proposed tax relief.
Mr. Trump's dark and defeatist attitude toward freer global trade has no statistical support: Since the key inflection point in 1973, with the Tokyo round of the General Agreement on Tariffs and Trade (GATT), the United States has enjoyed a 1.4-per-cent annual growth rate in employment, which actually beats Germany (0.9 per cent), Britain (0.6 per cent), Japan (0.5 per cent), France (0.4 per cent) and Italy (0.3 per cent).
The constant trend of U.S. trade deficits – the United States has been running deficits consistently since 1976 – reflects the consumer's insatiable appetite for spending more than anything else. To claim that deficits are harmful is to ignore that over this time frame, real GDP has expanded at nearly a 3-per-cent annual rate and employment has risen at a 1.5-per-cent annual rate.
Yes, output growth has outpaced employment growth, and the gap is otherwise known as productivity. If you want to, as a politician, try to reverse technological progress, then good luck to you.
Meanwhile, it is unclear that the protectionist policies being put forward by Mr. Trump's team are gaining traction outside his narrow base of support – a Washington Post/ABC poll over the weekend found Democratic presidential nominee Hillary Clinton leading 48 per cent to 46 per cent in terms of "handling the economy," 51 per cent to 41 per cent on "taxes" and 54 per cent to 40 per cent on "international trade agreements."
We'll see what sort of effect Mr. Trump's economic proposals will have in coming days; Ms. Clinton's plan is about to be unveiled, and while the fiscal math is equally daunting, it will be interesting to see how she responds – likely also with populist proposals and spending promises.
The question is how all this gets paid for. It was one thing for Mr. Reagan to boost the deficit in the name of defeating the Soviet Union, but he didn't face the constraint of a massive debt load, weak demographic support and a mere 3-per-cent growth trend in nominal GDP. Nominal GDP growth was 7.5 per cent on average during Mr. Reagan's tenure. The next president will not have this luxury.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.