1. Opinion

Reform needed, but not stimulus

Published Dec. 5, 2016

You would not know it from the rhetoric of the recently completed political campaign, but the United States is in pretty good economic shape.

The unemployment rate stands at a mere 4.6 percent of the labor force, the lowest level since August 2007, according to the Labor Department report published Friday. Inflation is running at a manageable 1.6 percent. The Dow Jones stock index stands at an all-time high of over 19,000. And hourly wages are growing at an annual rate of more than 2 percent.

By any conventional measure, President Baracl Obama is handing his successor, Donald Trump, a far, far better situation than the one he inherited in January 2009. Reflective of that reality, the Federal Reserve is likely to continue its gradual normalization of monetary policy by raising interest rates slightly later this month.

There is, indeed, room for improvement: Broader labor-market statistics that account for underemployment (involuntary part-time work and the like) have still not quite returned to pre-recession levels. Labor-force participation remains subpar, especially among men in the prime working years between the ages of 25 and 54. Productivity growth has slowed. And the federal budget deficit has resumed growing, reflecting the continued imbalance between spending commitments (entitlement programs, defense spending) and revenues.

In short, the punishing cyclical crisis of 2008-2009 is far behind us; there is no need for large-scale, short-term stimulus. The economy faces long-standing structural issues, which call for long-term structural reforms.

In their more lucid moments, Trump and his advisers have spoken of targeted deregulation, business tax reform and other measures which might enhance the economy's growth potential, depending on how they are actually done.

At other times, unfortunately, they have spoken of massive defense spending increases or huge tax cuts skewed in favor of the wealthy; Trump's top political adviser, Stephen Bannon, dreams of a conservative nationalist pseudo-New Deal in the form of "a trillion-dollar infrastructure plan. ... Shipyards, ironworks, get them all jacked up. We're just going to throw it up against the wall and see if it sticks."

Cooler heads must prevail. The record of nationalistic economic populism around the world is a dizzying and destructive one of boom followed by bust. Even if matters do not reach that extreme during the Trump administration, reckless expansion of the federal debt would not only violate Trump's campaign promises, it would use up "fiscal space" the federal government needs to address a true economic emergency. Under no responsible reading of the data does our current situation fit that description.