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The Economy Grew Even Faster in Truman's Presidency. So What?

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The Economy Grew Even Faster in Truman’s Presidency. So What?

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President Harry Truman in 1950 bound for the Pacific to meet Gen. Douglas MacArthur. The American economy grew by more than 13 percent in the fourth quarter that year, the highest since quarterly numbers began.CreditAssociated Press

By Robert J. Shiller

Based solely on a few headline numbers, the American economy looks good. But it would be a mistake to read too much into the data — or to give too much credit to President Trump.

In fact, the most spectacular economic growth since World War II occurred nearly 70 years ago, when Harry Truman was president. But Truman didn’t cause it, and it wasn’t particularly good news.

First, let’s look at where we find ourselves now. Avid supporters of Mr. Trump attribute good economic tidings to him. His policies — tax cuts, curtailment of immigration, reduction in regulations — and confidence-building talk are seen as driving faster economic growth.

But that is largely a misreading of the way modern economies work. They have a tendency to alternate between booms and recessions for reasons that are imperfectly understood but involve changing popular narratives, the contagion of ideas and emotions, and circumstances that are mostly outside a president’s control.

Certainly, since the November 2016 election, many of the numbers seem impressive. The American stock market is up more than 30 percent. Single-family home prices are up more than 10 percent and real growth in the gross domestic product for the second quarter reached 4.1 percent annualized. In May, the unemployment rate fell to 3.8 percent; it hasn’t been lower since 1969, though it edged up to 3.9 percent in July.

These numbers may look like evidence of a fundamental transformation, but that view overstates the significance of such statistics.

The numbers are actually driven by changes in individual day-to-day economic decisions — many of them so small that people can’t say why they made them. In the case of the stock market, shareholders are claimants on corporate income and fluctuations in sales can have an amplified effect on share prices.

That 4.1 percent G.D.P. growth is hardly unusual: We have had 101 quarters of growth at least this great since quarterly G.D.P. enumeration started in 1947. These high-growth quarters were interspersed among sporadic quarters of negative growth, usually recessions.

To understand subtle economic changes, it helps to look at the biggest ones. The fastest annual G.D.P. growth since quarterly numbers began occurred over the period ending in the fourth quarter of 1950, when Truman was president. It was 13.4 percent, more than three times bigger than the 4.1 percent of the last quarter.

We ought to be able to understand what caused that colossal Truman boom. After all, there has been plenty of time to consider it.

There are many explanations, but we don’t really know the truth.

Whatever caused it, it doesn’t seem to have been presidential magic. As described in David McCullough’s 1992 book “Truman,” this president was a modest and courteous man, who did not ask to be treated as a genius, and virtually no one treated him as one. The Times, rather politely, called his speeches “down to earth.”

We know for sure that a tax cut didn’t spur growth back then: Personal income tax rates rose slightly in 1950. And government spending didn’t do it: Total government expenditure in 1950 was still near a postwar low. Nor did new protective tariffs cause the surge. The General Agreement on Tariffs and Trade, which went into effect in 1948, was in the process of reducing tariffs, not raising them.

In fact, it’s quite possible that the fundamental cause of the 1950 boom was bad news, not good. Recall that on, Aug. 29, 1949, the Soviet Union detonated its first atom bomb, ending the brief nuclear monopoly of the United States.

New York City’s first air raid siren wasn’t installed until October 1950. On Aug. 27, 1950, the Sunday New York Times published a front-page article, “City Folk’s Fear of Bombs Aids Boom in Rural Realty.” Many people wanted to move to the suburbs or to buy vacation homes or farms as refuges from the atom bomb. That fear helped to spur home building.

For several reasons, the United States in 1950 was at the peak of its biggest housing construction boom since 1929. It still counts as the peak, ranking even higher, as a fraction of G.D.P., than the boom just before the 2007 financial crisis.

Residential investment had been high since World War II, reflecting a postwar housing shortage and higher home prices, but it suddenly spiked much further after the A-bomb scare in 1949. It was likely driven higher still in 1950 by new fear generated by the Korean War, which began with the invasion of the south by the north, supported by both the Soviet Union and newly communist China, on June 25, 1950. By December, The New York Times reported that many people thought the world was on the brink of World War III.

In this bleak climate, Americans reacted with an epidemic of “scare buying” of automobiles and many other products that might be hard to get during a global war. During World War II, after all, such items were often rationed or just not available.

People feared re-imposition of wartime constraints on home building, too. Many consumers felt it might be now or never if you wanted a new home.

So, yes, 1950 had spectacular growth, but it was not a good year.

Now, in 2018, there are also some fearful narratives spreading through the country, though they seem less likely to motivate people to spend. The nuclear war scare of 2018 has not come close to the levels of 1950. And the mood of fear lingering from the experience of World War II is practically forgotten now.

Yet it seems likely that people in many countries may be accelerating their purchases — of soybeans, steel and many other commodities — fearing future government intervention in the form of a trade war. Surely some consumers, fearing that if they don’t buy a house or car now they may be faced with higher interest rates imposed by central banks, are making purchases earlier than they otherwise would have.

On a more positive note, the impulse to buy a home or a new car today could be subtly strengthening because of the demonstration effect of Mr. Trump, who models ostentatious living. Most of us can’t keep up with the Trumps, but he may be inducing some of us to be more focused on keeping up with the Joneses.

We have to be careful not to give too much credence to interpretations of the economy’s strength offered by the president, who focuses on his policies and ignores many other kinds of factors. Something — probably a variety of circumstances, narratives and emotions — has pushed consumption spending up a smidgen more than usual. That, from the long perspective of history, is really no big deal.

In fact, there could soon be a reversal of this strong-economy story, a sudden recession. But, if so, it won’t disprove Mr. Trump’s claims any more than the high growth of the second quarter proved him right.

Robert J. Shiller is Sterling Professor of Economics at Yale.

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Economy

US tariffs to have negative impact on economy: Survey

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NEW YORK – Anadolu Agency

U.S. President Donald Trump‘s tariffs would have a negative impact on American economy, a survey revealed Monday.

In the survey released by the National Association for Business Economics (NABE), 91 percent of business economists said current tariffs and threats to impose tariffs would negatively impact the American economy.

More than 65 percent of the participants said the U.S.’ withdrawal from the North American Free Trade Agreement (NAFTA) would also have “a consequential and unfavorable impact on the U.S. economy.”

While the renegotiations of NAFTA have started last year and yet to be concluded, Trump‘s tariffs have already strained relations between the U.S. and China, Canada, Mexico, the European Union, and recently the strong NATO ally Turkey.

A whopping 74 percent of survey takers said economic policy should do more to mitigate income inequality, while 60 percent said they believe economic policy should do more to mitigate climate change.

Trump announced in June 2017 that he intends to withdraw the U.S. from the historic Paris Climate Change agreement, which aims to reduce global carbon emissions.

The semiannual survey of the NABE was conducted between July 19 – Aug. 2 based on the responses of 251 members of the association.

Donald Trump, tariffs, Economy

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Israel's Finance Minister Aims to Improve Palestinian Economy

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China's biggest risk may be its property market — not the trade war

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China’s hot real estate market remains a challenge for authorities trying to maintain stable economic growth in the face of trade tensions with the U.S.

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In fact, property is the country’s biggest risk in the next 12 months, much greater than the trade war, according to Larry Hu, head of greater China economics at Macquarie. He said he is especially watching whether the real estate market in lower-tier, or smaller, cities will see a downturn in prices or housing starts after recent sharp increases.

Real estate investment accounts for about two-thirds of Chinese household assets, according to wealth manager Noah Holdings. The property market also plays a significant role in local government revenues, bank loans and corporate investment. As a result, a sharp slowdown in the real estate market’s growth and drop in prices would have a negative affect on overall economic growth.

So far, the market has been hot: The average selling price for newly built non-governmental housing in 60 tier-three and tier-four cities tracked by Tospur Real Estate Consulting rose 28.1 percent from January 2016 to May 2018. That’s according to a report last week co-authored by Sheng Songcheng, a counselor to the People’s Bank of China and an adjunct professor at the China Europe International Business School, an educational joint-venture co-founded by the Chinese government and the European Union.

Domestic property prices overall have also been rising for more than three years, the longest streak since 2008, the report said, citing National Bureau of Statistics data.

Property sales

Source: Wind, Macquarie Macro Strategy, August 2018

Last week, Nanjing, a tier-two city, announced a ban on corporate purchases of residential properties, following similar moves to limit speculation by Shanghai and some other cities.

That’s a good move for controlling risk, according to Joe Zhou, real estate and investment management firm JLL’s regional director for China capital markets. He said the government is not likely to loosen its policy soon and that prices could decline on average.

However, it’s unclear whether a downturn in China’s property market would necessarily impact overall growth on the same scale. The public still expects property prices to increase because the government has constantly switched between tightening and easing policies, often to prevent a drop in growth, CEIBS’ Sheng said in the report.

Analysts also generally predict authorities will counter tightening measures with stimulus in other parts of the economy such as infrastructure. In the meantime, China’s export-reliant economy also faces pressure from U.S. tariffs and rising trade tensions.

The economic outlook may be stable for now. But, if control on the property market doesn’t increase, then money will still flow into real estate rather than areas of economic need such as manufacturing, technological innovation and tourism, according to Thales Qin, executive director of the China Institute for Globalization of Cities at Beijing-based think tank the Center for China and Globalization.

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