I was part of a great panel with a couple of my fellow deans at Penn last week, speculating on what we might expect in the U.S. in 2017 and beyond. I made two fundamental points:
- There are three major truths that America’s economy must reckon with: increase the rate of economic growth; make sure that more people benefit from that growth; and increase rates of return in the financial markets.
- The economic agenda of the Trump administration is starting to look a lot like Reaganomics 2.0 (cut taxes, spend more, deregulate and don’t worry about the debt), which likely means both economic growth and the financial markets will continue their bounce in 2017.
Economic growth has not returned to anywhere near its historic levels following the 2008 financial crisis—closer to 2 percent than the historic post-World War II average around 3.25-3.5 percent. If we could get back there, most things would look—and feel—a lot better, including the great social and political divides that defined the election campaign.
At the same time, economic growth has to become more inclusive. Since 2000, real incomes for the vast majority of American households have been flat. Globalization and technology are our go-to growth drivers, but their benefits have been concentrated on only a small portion of the country—mostly well educated people living in big cities. We have to come up with solutions that allow more people to benefit from globalization and technology, rather than trying—and failing—to slow them down.
Finally, higher rates of return in the financial markets are not only good for people running hedge funds. They are essential to the retirements of most people. The assumptions built into 401k’s and public pension systems are the same—the markets will perform much better than the economy as a whole (historically, about twice as well). This performance gives us all the chance to retire comfortably, but it just hasn’t materialized in the 21st century to date.
“Tax cuts + deregulation + increased spending. That was Reaganomics. It looks like Trump will be its second coming.”
It seems likely that the two big issues on the legislative agenda in Washington D.C. in 2017 will be tax cuts and repealing the Affordable Care Act. Both are essentially the 2017 analogs of Ronald Reagan’s “government is the problem, not the solution” agenda on entering office.
Trump has quickly embraced a big infrastructure spending initiative to repair America’s aging roads, bridges and tunnels. This is Reaganesque too—but it is likely to take quite a while to line up the politics to make it work. Notwithstanding his small government rhetoric, Reagan actually significantly increased domestic spending, not only military spending. Trump will want to follow suit, but the politics will be tricky—because Republican fiscal hawks like Speaker Paul Ryan will want infrastructure initiatives to work mostly through tax credits for private sector projects, while Democrats will want the public sector to lead.
Tax cuts + deregulation + increased spending. That was Reaganomics. It is looking like Trump will be its second coming. But to what effect? Hillary Clinton’s “Trumped-up, trickle-down” label implied all the effects will be negative. That is probably unfair. Growth is already looking much stronger in 2017, and the markets are pointing north too.
The macroeconomic problem is that public debt was the Achilles heel of Reaganomics. Reagan believed in “Laffer curves,” that his policies would increase growth so much that public debt would actually decline—despite tax cuts and more spending. George Bush senior called this “voodoo economics,” and ultimately it was Bill Clinton who tackled the debt burden generated by Reagan.
Things might be different this time, ironically for Trump, because the globalization of capital markets actually makes Laffer curves less voodoo. But the central tendency of the Trump economy is likely to be “more growth today, more debt tomorrow.” Given America’s growth imperative, that may not be a bad tradeoff. Certainly lots of liberal economists have been calling for their own version of this Keynesianism for years.
But none of this takes up the inclusive growth challenge. Here, I really do believe education and training are key. I am increasingly persuaded by the view that America’s challenge today is not the absence of good jobs, but the absence of enough people with the skills needed to do these jobs. “More coders” might sound like a trite cliché. But it has more than a kernel of truth—we need more people who can do the jobs that the ICT revolution has created and will continue to create.
Put it all together and I think it is a great time for America’s business schools, including Wharton. What we saw in 2016 was certainly the product of deep and profound social and political divides. But if we can get the economy right, I believe the divides will lessen. And getting the economy right is what business schools are all about.