How will the U.S. economy fare in 2018? It’s a question foremost on the minds of investors trying to chart a course through a year that has already seen stock market dramatics and oil prices surge well above $60 a barrel.
The question was posed at the Executives’ Club of Chicago 39th Annual Economic Outlook forum recently to three notable economists, including Arthur Laffer, of Reaganomics and supply-side fame, who holds that lower tax rates can raise tax revenues and accelerate growth. Also on stage were Diane Swonk, chief economist at Grant Thornton LLP, and Dr. Bob Froehlich, chairman of First Capital Investment Corporation and FC Global Realty. The panel of experts was moderated by nationally syndicated columnist Terry Savage.
A mix of optimism and caution from the experts was mirrored in the capacity crowd, which through a show of hands seemed to be solidly in the middle ground as they reacted to three scenarios suggested by Savage. That is, the Dow Jones Industrial Average might trade between 21,000 and 29,000, was the crowd favorite, while the super-optimists (the Dow could top 29,000 in 2018) out-numbered the pessimists (the Dow could fall 20 percent from the current level).
Laffer: Bullish Outlook
Laffer praised the recent tax cuts. “We were the only country in the world with a global system where we taxed American companies’ profits anywhere they were earned,” he said.
He was also confident that the stock market had the potential to add to its historic gains this year. “We are primed for one of the biggest bull markets in history… and it will last.”
President Ronald Reagan embraced Laffer’s supply-side theory, lowering personal tax rates twice, from 70 percent all the way down to 28 percent. One should note, though, the supply-side theory embeds some rather heroic assumptions, which if they do not materialize, could lead to much higher levels of national debt. The ‘Laffer Curve’ depends critically on the embedded assumption of a very simple tax code without loopholes and special deductions. The more complex the code, the less likely marginal tax rates make much of a difference for economic growth.
Swonk: Consider the Risks
While an optimist, Swonk took time to focus on the risks. She said that geopolitical risk factors, such as the U.S.-North Korea diplomatic tension, could result in American companies being targeted. “Everything we are seeing today, the tit-for-tat, there is a lot more tension on borders because of the geopolitical situation which means multinational companies, particularly American companies, are going to be a target at a time we would like to be embraced by the world.”
On the U.S. economy, she said the tax cuts “could juice growth today but, in my view, are borrowing growth from the future. And I think this is important because we are depleting coffers at this very moment when we might have to deal with an asset bubble burst which is harder to recover from than a more traditional recession. There’s no such thing as a free lunch.”
She said that based on recent experiments in Kansas and Illinois, rolling back taxes could come with fiscal problems. “Something that is lost in translation in these (federal) tax cuts, in 13 weeks instead of a tax reform, we got a tax cut that became a free-for-all…there are so many things in there that we don’t know the unintended consequences (of).”
Swonk also said she expects the unemployment rate to drop to 3.6 percent, which would be lowest since 1969.
Froehlich: Game Changers Coming
Froehlich said there are three major themes that are going to “turn you upside down and turn the investing world around forever.”
The first of these is the rise of the e-sports economy, a relatively new phenomenon in which he says about 190 million people watch at least monthly.
“That 190 million figure is double that of five years ago, and by 2020 there will be 300 million people in this country tuning in to an e-sports event,” he said, adding that the purse for the annual international Dota e-sports competition in Seattle is $20 million – nearly twice that of the prestigious U.S. Masters golf championship.
Froehlich’ssecond theme, the outer space economy, is already a $300-billion-dollar industry whose value could more than triple over the next 10 years with dramatic implications for the internet, aerospace and defense industries, telecommunications and the media.
The third theme, the passenger economy, could be the most dramatic of the three, Froehlich said, adding that it could cause a paradigm shift in the automotive sector and impact the airlines, technology, real estate and energy sectors. “We drive globally 10 trillion miles a year at an average cost of $1 a mile, making it a $10-trillion market.”
“If a ride-sharing company can garner maybe a miniscule 1.7 percent of that global market, driving 170 billion miles at probably $1.50 (a mile), which means it will generate $255 billion in revenue. That, by the way, will happen in the next five years,” he said, adding that Toyota’s revenue hit $250 billion last year for the first time in its 70-year history.
“There is an economic ripple effect that is about to happen that no one realizes,” said Froehlich. Increased ride-sharing would mean lesser need for parking space which could help create a boom in downtown areas, he adds. “This is a game changer.”
The Chicago Executives’ Club Economic Outlook forum framed the issues for 2018 well. The corporate tax cut has engendered strong optimism. However, looking beyond tax cuts, there are some formidable risks from trade policy and economic disruption, that could change the outlook dramatically were they to occur.