05/14/2019 | Press release | Archived content
Thankfully, President Trump rejected the false premise that the American economy's best days were behind us. The American economy's performance today, with the lowest unemployment rate since the 1960s and economic growth that consistently beats expectations, vindicates his argument and proves that America's economic engine was running far below capacity before Trump's election.
This has been a great accomplishment, but beneath the surface we face serious, long-term structural challenges. Trump rightly argued that U.S. economic policy for the last three decades has left working families behind, that our trade agreements were not balanced, and that too much wealth was narrowly flowing to the financial sector. These are fundamental arguments about the long-term direction of the American economy, not merely how efficiently it can operate in the short term.
Most Americans understand how a healthy, free market economy functions. Financial institutions connect businesses with great ideas to the capital they need to bring those ideas to fruition. Businesses invest in new projects and workers who receive wages that support families, purchase products, and save for the future. Financial institutions then lend those savings back out into the economy, starting the cycle over again with greater productive resources than it had to begin with.
This is the dynamic cycle driven by profit-seeking business enterprises. It was our biggest competitive advantage over the failed, centrally controlled socialist economies of the past, and should continue to be over China and other competitors of the future.
However, these are increasingly not the terms upon which the American economy operates today. At the turn of the 21st century, America's nonfinancial corporations, the business sector that we expect to invest in capacity, projects, and workers, flipped from their historical role as net borrowers from the rest of the economy, to net lenders to it. What does this mean? Today, the nonfinancial corporate business sector routinely spends more on buying financial assets than on capital development.
This change has occurred simultaneously with the tremendous growth of America's financial industry. Over the last four decades, the financial sector of the U.S. economy saw its share of corporate profits increase from about 10% to nearly 40% before the 2008 financial crisis, and nearly 30% in 2018. During this period, the capital that corporations returned to their shareholders tripled, while business investment decreased by 20%.
Economic growth is now more driven by finance than innovation in the production of real assets. Many widely cited economic statistics do not fully account for this fundamental shift in the direction of the economy. The report I am releasing this week does. The report argues that since the 1970s, changes made by American businesses and policymakers began prioritizing high returns to investors in the short term, rather than investment in long-term capabilities.
There are great implications to this shift. American workers become line items on a ledger rather than essential contributors to value creation. Investment in domestic innovation and research is often cut or outsourced to competitor nations such as China, which then steals technology to develop and win the technologies of the future - robotics, artificial intelligence, advanced pharmaceuticals, and 5G.
At the heart of this shift is a confusion between the rate and direction of economic growth. While markets create economic efficiency, efficiency alone provides a means without an end. As sociologist Daniel Bell described it, 'economic guidance can only be as efficacious as the value system which shapes it.' The value system which our public policy must promote is a culture of dignified work, strong families, thriving communities, and patriotism.
After a long economic malaise, we are finally seeing positive signs because of Trump, his administration, and Republicans in Congress. The Trump boom in our economy has rewarded workers long overdue for a raise. However, short-term economic growth does not guarantee a strong and prosperous nation. If we do not change our public policies to reflect long-term investment as a priority, we will not be able to compete globally or build the America our values demand.