The Economist Asia - February 10, 2018

The EconomistFebruary 10th 2018 33

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1

G

OOD economic news is not always

good for everyone. On February 2nd it

was revealed that average hourly wages

grew by 2.9% in the year to January—the

fastest growth since 2009, at the end of the

recession. Stocks promptly tumbled

around the world (see page 63). Investors

fretted that inflation might rise, forcing the

Federal Reserve to raise interest rates fur-

ther and faster than expected. Whether the

jitters are justified, however, depends on

how an extraordinary experiment in eco-

nomic policy plays out. America is poised

to stimulate an economy that is already

growing strongly, at a time of historically

low unemployment.

Most of the stimuluswill come from tax

cuts that President Donald Trump signed

into law in December. These are worth

0.7% of projected GDPin 2018 and 1.5% of

GDPin 2019. On February18th Senate lead-

ers sketched out a budget deal containing a

further fiscal boost. If the proposal passes,

defence spending will rise by $80bn this

year, pleasing Republicans. Democrats

have been offered $63bn in spending on

other programmes. The total increase in

outlays is worth another 0.7% ofGDP. The

White House also promises to unveil an in-

frastructure investment plan on February

12th. Higher spending will add to govern-

ment borrowing that, after tax cuts, is al-

ready likely to reach almost $1trn, or 5% of

GDP, by 2019 (see chart 1).

The economy does not look in obvious

nedy’s tax cuts had been signed into law in

1964. His successor, Lyndon Johnson,
      raised spending to pay for his “Great Soci-
      ety” programmes and the war in Vietnam.
      The budget deficit rose from 0.2% ofGDPin
      1965 to 2.7% ofGDPin 1968. Inflation rose,
      too, to over 3% in 1968 and almost 5% in


1965. As the year ended, fiscal and mone-
      tary tightening caused a mild recession.
      The comparison is hardly perfect,
      though. America’s economy was very dif-
      ferent in the 1960s. Almost a third of work-
      ers belonged to trade unions. Around one
      in four had wage agreements indexing
      their pay to inflation. Today fewer than 11%
      of workers are unionised and wage index-
      ation is so rare that it is no longer closely
      tracked. Meanwhile global competition
      and discounting by online retailers holds
      down the prices of goods. Moreover, the la-
      bour market was not the source of the truly
      memorable inflationary episode of the
      post-war era. That began in 1973, with the
      first of two surges in the oil price, which
      sent inflation soaring to 10%.
      In some ways today’s experiment looks
      more like the boom ofthe late 1990s (see
      Free Exchange). Alan Greenspan, then
      chairman of the Federal Reserve, kept
      monetary policy loose enough to push un-
      employment down to 3.8% by April 2000.
      Mr Greenspan had correctly anticipated
      that computerisation would increase the
      economy’s productive capacity and let
      some of the pressure out of the expansion.
      Inflation stayed comfortably below 2%
      even as wages soared. The boom eventual-
      ly came to an end because a bubble in tech-
      nology stocks popped—and, perhaps, be-
      cause Mr Greenspan was less alert to
      recessionary signals than he had been to
      evidence of technological change.
      As the stock markets wobble again, that
      parallel may seem unnerving. Hawks have
      insisted for years thatloose monetary poli-

need of stimulus. Unemployment stands

at just 4.1%. Workers are in a seller’s market.

Wages are rising and in December 3.3m

Americans quit their jobs for pastures new,

the second highest reading on record. In

2017 the economy grew by 2.5%, above the

roughly 2% trend that official forecasters

think issustainable as the population ages.

With the economy so strong, and stimulus

on the way, it is natural to worry about

overheating. That a new and untested Fed

chairman, Jerome Powell, took office on

February 5th, as markets tumbled, only

makes people more anxious.

Hawks point to the late 1960s for signs

of what is to come. In early 1966, following

a long spell of low inflation, unemploy-

ment fell below 4%. President John F. Ken-

The economy

The great experiment

WASHINGTON, DC

America is about to stimulate an already pacey economy. That is probably less

illogical than it seems

United States

Also in this section

35 Politics and the FBI

35 Wildfire and fraud

36 A Democrat in South Dakota

37 Prozac in the Great Lakes

38 Lexington: Honest Injun

Deficit hawks, look away now^1

Sources: CBO;

JCT; The Economist

*Calculation assumes projected boost

to GDP from tax cuts is immediate

United States, projected budget deficit, % of GDP

6

5

4

3

2

1

0

2016 18 20 22 24 26 27

Before tax cuts After tax cuts*