US economic upsurge: Fed deserves the credit

"I don't think that credit for the current US economic upsurge can be claimed by Donald Trump and his economic managers."


Whenever an economy performs very well or very badly, the first instinct of most discerning people is to try to determine the place where credit or blame—as the case may be—should be laid. This is both necessary and logical because good economic performance or bad economic performance, is the result of steadfast implementation of sound economic policies.

This matter of who should be praised or blamed for an economy’s performance has come to the fore anew in the case of the current state of the US economy. The world’s No. 1 economy is doing very well. Since 2017 America’s GDP (gross domestic product) has been growing above 3 percent annually and during the most recent quarter it grew at an above-4-percent pace. Perhaps most important of all, the unemployment rate in that country is currently at its lowest level in 49 years. Most of the companies in the Fortune 500 list of the biggest US companies are operating profitably, with many companies posting record profits. As a result, America’s stock market has been experiencing one of the longest bull runs in the history of the New York Stock Exchange. And these good things have been taking place in an environment of comparative price stability.

It is natural for the performance of an economy—good or bad—to be attributed to the political party that is in power. If the economy performs well, that party gets the credit; if the economy is stumbling, it gets the blame. Accordingly, the Republican administration of President Donald Trump is being accorded the credit for the current strong performance of the most powerful economy in the world. Mr. Trump has accepted the credit, attributing it principally to the corporate and individual income tax cuts approved in 2017 by the Republican-controlled Congress and to the tariff increases that his administration has put in place against virtually all of America’s longtime allies.

The Trump administration came into office in January—more like February—2017 and has therefore been at the controls of the US economy for less than two years. Is such a period long enough for the generation of the kind of strength that the US economy has been displaying of late? Corollarily, can the Trump administration fairly claim credit for the US economy’s current growth momentum?

To both questions my answer is No; I don’t think that credit for the current US economic upsurge can be claimed by Donald Trump and his economic managers. I think that that credit belongs elsewhere. In support of my view I point to the concept of leads and lags in economic theory, more specifically in the sub-theory of economic policymaking.

Leads and lags are quite easily explained. They arise because of the gap that necessarily exists between the time that a policy decision is made and the time that the projected output comes into the market. That gap may be measured in weeks or months or years. Because the first line of the proposed Metro Manila subway system is estimated to be ready for service in 2025, the lead time needed for such a facility—an urgently needed facility, to be sure—is seven years. And by the time 2025 comes around, the Metro Manila commuters living then will speak of the 7-year lag between the community problem of 2018 and the inauguration of this country’s first subway system seven long years later.

The implication of the foregoing discussion is clear: development planning is about always practice leading to avoid lagging. If this is not done —a state of affairs with which Filipinos are familiar —bottlenecks and all sorts of economic distortions materialize.

The concept of leads and lags does not give rise to questions of responsibility and accountability when the leading and lagging takes place in a non-democratic setting.

That is not the case in a democratic environment. A public project commenced today in a country like North Korea or a country with a president-for-life (like China) will very likely be completed during the Beloved Leader’s stay in office. But in democracies there are political-term limits and government changes during the implementation of a public project. The inauguration of the first Metro Manila subway line will be undertaken by President Rodrigo Duterte’s successor.

Economic policy decisions generally take long periods to wind their way through an economy. The more complicated the issue that a policy decision has to deal with, the longer the needed winding-through period. 2018 marks the tenth anniversary of the onset of arguably the worst world economic recession, and it took almost that entire 10-year period for the US economy to return to normal. That is a lot longer than the less than two years that the Trump administration has been in office.

The US economy had to return to normal before it could begin to move upward again after the horrendous 2008 downturn. It took all the know-how, experience and stature of Federal Reserve Board chairmen Ben Bernanke and Janet Yellen to bring the world’s largest economy back from the abyss. Yet, it took them years to return it to normalcy.

It is the US Fed—and especially chairmen Bernanke and Yellen—that deserve almost all the credit that the vigor that the US economy is displaying these days. Not the Trump administration.

Topics: Federal Reserve Board , Ben Bernanke , Janet Yellen , New York Stock Exchange , Economy , Donald Trump
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