September 21, 2016 | by Steve Lawrence

Seeing Hope in the Morass

The economy’s hidden strengths and the importance of breaking government gridlock

She’s not saying that we will most certainly break out of the economic malaise gripping the country. But she is saying that the foundations of strength are there. The inescapable conclusion, then, is that we must elect national and local politicians who will work together to break the paralysis in Washington.

Diane Swonk, keynote speaker at MSCI’s Economic Summit: Forecast 2017, and “one of the top forecasters in the country” according to the Wall Street Journal, pointedly described infrastructure spending and comprehensive tax reform as the two most powerful weapons to break the economy out of its slow-growth rut. “Policy and policymakers matter,” she said. Without knowing it, Swonk was delivering a persuasive endorsement for MSCI’s Get Out the Vote campaign.

Her talk was clear that she was hardly a fan of Donald Trump and his policies. But regardless of who occupies the White House next year, she saw “some hope” that those leading the House and Senate might be motivated toward “some movement” on these key issues. “Chuck Schumer, who will be the Senate leader, is a deal maker,” Swonk said. “And Paul Ryan, the House Speaker, who will almost certainly be running for President in 2020, would very likely want to have some accomplishment to show for his service.

“The degradation of infrastructure spending in this country has been dramatic,” she said. “Despite solid public and even bipartisan political support, we have neglected both infrastructure and R&D spending.” Both of these, she said “are surefire ways to juice up the industrial economy.

“And if we could get sensible corporate and individual tax reform, we could make it much easier for businesses to make efficient decisions and stop wasting time working on how to game the system.”

But in spite of several notable points of strength in the economy, “there remains far too much uncertainty in the minds of our business leaders,” she said. “We are now at a turning point.” Consumer spending continues relatively strong. Wages are up slightly and balance sheets are improving,” Swonk said. “Household debt has dropped and home values and sales have strengthened so that mortgages and home equity loans are easier to get.”

But that uncertainty has caused “something to go wrong with the traditional relationship of profits to business investment. Profits are simply not driving investment as they once did,” she said. “It’s discouraging to see how few companies these days are willing to invest in the future.” Instead they are buying back stock, replacing equipment more slowly, working shorter shifts and increasing dividends. “When a company boosts its dividend payments,” she said, “It is essentially saying ‘I have nothing better to do with my money than give it back to you.’”

The domestic economy will not get much help from Europe, she said “and many key markets including China are now struggling.”

Swonk concluded that 2016 could well be the weakest year of the recovery so far. “And if we are to get out of this rut and really start growing, we need that government spending.”

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