The growth Mnuchin wishes

Steven Mnuchin Interview:

Treasury Secretary Steven Mnuchin laid out ambitious goals to secure a U.S. tax-code overhaul by August and to deliver economic growth at rates not seen in more than a decade.

Mr. Mnuchin, in his first interview since his confirmation last week as Treasury secretary, said slower economic growth since the financial crisis had primarily been an anomaly and a result of Obama administration policies that can be reversed. He said the Trump administration is aiming for a sustained 3% or higher annual growth rate, a projection not widely shared by other forecasters.

“We think it’s critical that we get back to more normalized economic growth. More normalized economic growth is 3% or higher,” Mr. Mnuchin said.

At 7AM on Thursday, he was in CNBC Squawk Box.

As he expounded his views, the markets began to fall! And they continued to fall into Friday.

Why? Weren´t markets excited back in November with Trump´s election and the prospect for higher growth (and inflation).

Now his main economic policy person comes along confirming those growth objectives and the markets backpedal!

As was mentioned in comments about the interview:

“He was being optimistic while at the same time laying out the possibility that, you know, it’s not totally in the administration’s hands, and it’s not.”

In addition to the “timing constraint” (August), there is the Fed constraint that has to be taken into account.

The Fed (and the CBO) firmly believe growth going forward cannot be much different from 1.8%, quite smaller than the 3% plus contemplated by Mnuchin and the Trump administration.

Mnuchin gets it right when he says that slower economic growth has been an anomaly.  What he (and many) miss is that in addition to anomalous low growth, we have an “anomalous” low real output level.

The chart shows that since the 1870s, 10-year real output (RGDP) growth has averaged 3.1%. In the chart, I indicate that the drop in output growth during the Great Depression was significantly bigger than during the Great Recession.

The difference, however, is that following the GD there was recovery, meaning output growth moves back to trend. In 1940, seven years after the trough of the depression, output growth was back on trend. It might have gotten there earlier if the Fed (and Treasury) had not bungled causing the 1937/38 recession.

After the GR no such move can be detected, and seven years after the trough of the recession, RGDP growth is even lower!

Moving to the level chart, we see that by 1941, just before the US entered WWII, the level of output was back on trend, i.e., the economy had fully recovered.

Looking at the chart for the more recent period, we observe that output never even tried to get back to trend after the big monetary policy mistake of 2008 brought it down forcefully.

Did Obama policies contribute? They may have, since “too much government can be bad for the economy´s health”.

In that case, “overhauling the tax code” and pursuing supply-enhancing policies will likely increase growth.

Just like the Great Depression, the Great Recession was “monetary policy made”, so like in the 1930s, monetary policy today has to change to contribute to higher growth (and a level of output closer to trend).

Unfortunately, the Fed does not recognize its role in the debacle. It has even done some “faking”, with the “potential” (or trend) level of output, and the “potential” growth rate being lowered to make the economy “look good” and the Fed justified in “normalizing” policy.

Bottom Line: The markets dropped because “growth promises” are getting less and less believable.


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