By Phil Grant
If we can get taxes down, keep energy prices down and avoid significantly higher medical costs, this economy has a chance to really boom. With tax incentives, more streamlined regulation and dollars available for training, Trump is enticing many businesses to come back to America to reinvest their profits here rather than overseas. He is also motivating foreign companies to relocate here. This will help create more jobs and higher wages. Trump’s enthusiasm to rebuild the U.S. economy is infectious and has already helped transform consumer confidence into the highest it has been in years.
A number of prominent measures of economic activity are simultaneously showing very favorable levels right now. In addition to consumer confidence being up: welfare is down; inflation is low; company profits are up; interest rates are low; productivity is good; gross domestic product (GDP) is considerably higher, stock market growth has accelerated, housing sales are at a peak and our trade balance is improving.
But I like to look at changes in each of the following six ratios that, when multiplied together, equal discretionary income per person — a major economic measure and determinant of consumer demand and standard of living: (1) The labor force participation rate is up; (2) the employment rate is up; (3) work hours per employee have increased; (4) hourly wages are starting to ascend; (5) disposable income as a percentage of wages is poised to increase with tax reduction, and (6) discretionary income as a percentage of disposable income is ready to rise if we can keep energy and medical costs at bay.
Multiply these six ratios together and you get discretionary income per person that has to be higher given each of the component ratios is higher. When discretionary income per person increases there is more money in the pockets of people to buy what they want. More money means the potential for more purchases — greater demand.
Now, when consumer demand increases suppliers respond with some mix of higher prices and increased quantity supplied (produced and sold). If companies are close to capacity production already, do not have a whole lot of production flexibility, and do not have many fellow suppliers competing for that higher demand, they tend to respond to the increased demand more with higher prices than with higher quantity produced and sold. But if companies have considerable underutilized capacity, face significant competition (multiple companies providing supply) in meeting the demand increase, and enjoy flexibility in their production systems they will gravitate toward increasing the quantity they produce and sell instead of the price they charge — greater supply.
At present we tend to see the latter case described in the previous paragraph. Companies, taken as a group, are said to have an elastic supply curve — a relatively horizontal supply function that can increase goods and services by a relatively great amount, without much of an upward adjustment in prices, in response to any advancing demand. This is a good thing.
In other words, the evidence is that demand for goods and services is on the rise and suppliers can accommodate such demand increase without raising prices. This translates to more jobs, more wages, greater real GDP growth, and higher standards of living.
Indeed, if we can stay out of additional wars, and if the rest of the world’s economies do not fold, we may see marked economic improvement under Trump, particularly if companies come back and convert their high cash balances to investment and wage increases. Trump’s lower individual tax rates will increase disposable income and thus spur additional demand, or consumption. The lower business tax rates will spur investment in capital and in employees so business can increase their supply of goods and services without price increase.
The biggest problem is our Congress, which could make a mess out of the particular tax reduction plan that Trump knows is needed to spur demand and quantity supplied, and vitalize the economy. Congress has a history of “watering down” great plans through excessive compromise. When you try to give every state what it wants instead of striving for what is best for the United States as a whole you can drastically reduce the constructive impact of the plan. Optimizing results for individual states usually prevents aggregate economic system optimization.
Trump’s positive attitude toward America and his business-friendly approach are in stark contrast to Obama’s anti-America, anti-business stance, and it is making a difference.
Phil Grant, Ph.D., Hon. DBA is professor emeritus at Husson University. He has written many books and articles on management and economics. His latest book is “The Mathematics of Human Motivation.” About ready to hit the press is “Grant’s 12 Laws of Human Motivation.”