Economic Doctors Have Misdiagnosed the Economy

Economic Doctors Have Misdiagnosed the Economy
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Too often, when listening to politicians talk about what ails our economy, I feel like I'm watching a television medical drama. And I don't like doctor and hospital TV shows.

It's a faulty formula. Early in the hour, a patient shows up in dire trouble. The doctors misdiagnose the ailment, and try various mistaken treatments. Eventually, with the patient's life hanging in the balance, somebody figures out what's really going on, offers a remedy, and viewers await the next episode.

During the 2016 presidential campaign, there was a great deal of bad diagnoses served up on the U.S. economy.

As a proposed successor to President Barack Obama, Hillary Clinton ran, more or less, a status quo campaign. In her view, the patient was pretty darn healthy. Such a conclusion missed glaring symptoms that something was desperately wrong.

For example, after the deep recession running from the end of 2007 to mid-2009, real annual economic growth during the subsequent recovery/expansion period has averaged a mere 2.1 percent. In contrast, growth has averaged 3.1 percent over the past six decades, and 4.3 percent during recovery/expansion periods. So, economic growth has been running at less than half the rate it should have been during the past seven-plus years.

However, Donald Trump - now President-elect Trump - saw that the patient was very ill. And while he threw about an assortment of possibilities of what might be wrong, he clearly was passionate about trade being a key negative - another misdiagnosis.

Trump railed about trade deficits. But that meant ignoring that U.S. trade deficits tend to rise during good economic times - as strong domestic growth attracts imports, and investors see the benefits of investing in the U.S. - and shrink during slowdowns and recessions, as was the case during the 2007-09 recession, as well as the 1990-91 slowdown and recession, and the economic mess prevailing during 1979 to 1982.

Free trade deals also were criticized by President-elect Trump, especially NAFTA. But free trade has expanded opportunities for U.S. entrepreneurs, businesses, workers and consumers. Consider that real U.S. export growth has been strong to 17 of the 20 nations with which we have free trade agreements since those agreements went into effect. That includes our NAFTA trading partners. Since we've had trade accords with both countries, growth in exports to Canada and Mexico have run well ahead of U.S. economic growth. In fact, real merchandise exports to Mexico under NAFTA have grown at nearly four times the growth experienced in real U.S. GDP.

On trade, whether individuals and businesses exchange domestically or across borders, it's critical to understand that the economy is not a zero-sum game. Under free trade, more robust growth in places like Mexico and China mean expanded opportunities for U.S. businesses and workers.

Trade deals have not harmed the U.S. economy. Rather, our economic woes largely have been about anti-growth Obama-nomics. That is, increased taxes, hyper-regulation, expanded government spending and debt, and a lack of leadership in advancing free trade have raised costs, created uncertainty, and undermined private investment and entrepreneurship.

Contrary to fictional TV doctor shows, however, when it comes to the economy, no guarantee exists that someone is going to offer the right diagnosis and treatment. To the extent that President-elect Trump focuses on sound policy prescriptions of substantive tax and regulatory relief, and reining in the size of government, while putting aside anti-trade snake oil, the U.S. economy will recover and return to robust growth.

Ray Keating is an economist and a novelist.  His new thriller is Lionhearts: A Pastor Stephen Grant Novel.  

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