Trajectory of the U.S. Economy: Key Influences on Business Decisions

Brett House (00:00:00 - 00:01:04)

Well, right now, I'd like to be doing business in the United States more than any other place in the world. We had the highest growth rates in this country in the G7 in 2023. We're likely to see the highest growth rates again by consensus forecasts in 2024. Productivity is increasing. Total growth is increasing quickly, in part because immigration has also resumed into the United States from the pandemic shutdowns.

And regardless of what you hear in the forthcoming election campaign, that is a massive strength for the United States. That's adding to the total GDP pie. It's also ensuring over time, productivity is likely to increase, and the aging demographics that almost every country face are being countered to some extent here by those immigration inflows. So, I would want to be here. And that's not just because we're speaking to Americans. The data support that view, and I think the potential for continued growth is stronger here than almost any place else.

Announcer (00:01:04 - 00:01:20)

Welcome to Paychex Thrive, a business podcast where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks.

Gene Marks (00:01:21 - 00:01:58)

Hey, everybody, it's Gene Marks, and welcome back again to another episode of the Paychex Thrive podcast. Thank you so much for joining us. Before we get started, another reminder, if you need any advice or tips, help running your business, if you'd like to see some older episodes of this podcast and get other content, sign up for our newsletter. It's free. If you go to paychex.com thrive, you can sign up there.

All right, to the economy this week I am speaking with Brett House. Brett is a professor of Professional Practice at Columbia Business School in New York. Brett, first of all, am I talking to you from New York City? Is that where you're at right now?

Brett House (00:01:59 - 00:02:03)

You are. You're talking to me, with me at my office here at Columbia Business School.

Gene Marks (00:02:03 - 00:02:06)

Very good. And what's it like in New York today? Nice weather.

Brett House (00:02:06 - 00:02:13)

It's a beautiful sunny day. It's cold and crisp, which for a Canadian, is exactly how you want March to be.

Gene Marks (00:02:14 - 00:02:57)

I agree. I agree. I play squash with a guy from Canada. He's from Regina in Saskatchewan, and he prefers the colder weather than the warmer weather. So, I guess you have that in common. Everyone who's watching or listening to this Brett is ... His research and writings are focused on macroeconomics, international finance with interest in fiscal issues, monetary policy, international trade, financial crisis, debt markets, all the great stuff that we want to learn. And Brett, like I said before we started recording this, our audience are small- and mid-sized businesses, both managers and owners, and I think they'll have a lot of interest in what you have to say. First of all, tell us a little bit about your background and how you got to be teaching at Columbia.

Brett House (00:02:57 - 00:04:42)

Well, I grew up not far from you in the Niagara region of southern Ontario. So, just a little further over on Lake Ontario. And I came of age in the eighties when Canada was debating free trade with the United States, and it was an existential issue in political and social terms for the country and for small businesses.

A big section of the Niagara economy is agribusiness and agritourism. There's been a small wine industry there for decades, a lot like the Finger Lakes wine industry, and they were pretty worried about getting wiped out by opening up to free trade with producers from California, Washington, and Oregon. And two big elections got fought on free trade in Canada in the eighties. And that is part of what made me an economist. I guess I also wanted to ensure I could have a positive impact, not just for my country, but for the world.

There was a slogan from the Chartered Accountants Association in Canada back a few years ago that said, sometimes the last word in an argument is a number. And I wanted to be sure that I could pin down what that number would be, both in figuring out what affects long run growth and development, the kind of change we see in economies over decades, and how we ensure countries get on a path that brings as many people along to economic wellbeing as possible. And we know that there are hiccups on those paths. We hit financial crises, we get bubbles in different asset markets. I want to ensure that I would have some hand in anticipating those bubbles, avoiding them if possible, when things go awry, helping to mop up from a mess as quickly as possible, and put an economy back on that good path of growth.

Gene Marks (00:04:42 - 00:05:15)

You teach about global macroeconomics, and obviously that comes from your days as learning and teaching about free trade. Let me ask you about free trade just because you brought it up originally. We have the North American Free Trade agreement between the U.S., Mexico, Canada. After doing this for as long as you have been studying this and teaching about it, are you a proponent of free trade? Do you think free trade zones are overall good for all the economies involved, as well as the small- and mid-sized businesses that would be impacted by a free trade agreement?

Brett House (00:05:16 - 00:06:27)

I do. I think the evidence keeps mounting that freer trade, better access to markets, letting companies and consumers decide what they want to buy with very few impediments in between between countries leads to higher growth, greater diversification in production and consumption, and better diffusion of technological ideas and innovation. If we look at NAFTA, it's been a massive success for Canada, the U.S., and Mexico. And if anything, what it augurs for, rather than more free trade agreements that bring together small regions of countries, what it really points to is the need for countries to open up unilaterally.

The gains from trade come not from getting your exports necessarily into other markets, but ensuring consumers at home can get access to goods and services more cheaply. You can get all the gains from trade just by lowering your tariffs. You don't have to be in a regional agreement or even a pan-regional agreement. And we see the countries that continue to do best over time are generally those that have adopted more open approaches to trade.

Gene Marks (00:06:28 - 00:06:40)

Obviously, if you don't feel comfortable answering this question, it's completely fine, Brett. I'm comfortable answering anything. You're like me. For me, if I don't know the answer, I'll just make it up. I'm not saying you do that.

Brett House (00:06:40 - 00:06:45)

I will make it up. But I'll be clear what I know and what I don't know, the reason why.

Gene Marks (00:06:45 - 00:07:43)

I think about it now, as we're talking about free trade, the success of the North American Free Trade Agreement, as well. I think about the UK and in England, and I think about Brexit, which happened a few years ago. It's still a sore spot among many people. When, when the UK decided to split from, you know, from the European Union, my first thought was that, man, you know, this could be a great thing for a country like the UK.

I mean, they can strike their own independent deals. They could have a free trade agreement with the US or some type of bilateral agreement with the U.S. That would really be a big benefit to both countries. And yet that hasn't happened. You know, and I know we have a lot of people listening and watching this that do business in the UK or have UK customers or purchase materials from suppliers in the UK.

I'm curious if you have any thoughts on that, on why the UK has not yet gone into some type of a trade agreement with the US. What are your thoughts on that?

Brett House (00:07:44 - 00:09:16)

Well, the UK committed the single biggest shot in the foot of any major country in the last decade by withdrawing from the European Union and losing access to the markets that it had there. That is cutting it off from major international investments in the UK economy. If you are a company looking to service Europe, it would be far more prudent to put a plant, a distribution center, or even just a finance and marketing office in Europe rather than in the UK, because you have far less uncertainty than about the future access to the market that you're going to have. Why hasn't the UK pursued all of those amazing trade deals that the proponents of Brexit said they would be going after? They have been consumed by political turmoil to such a great extent domestically, churning through a few leaders in the Conservative Party, that I don't think they've had the bandwidth to then go out and sign meaningful agreements with the rest of the world.

The fact is, too, that it is not at all clear exactly what the UK would want in a trade agreement at this stage, because many of the things that they had access to in the European Union are exactly the things that they would ask for from another trading partner. And so it's not clear what kind of negotiating person or entity is on the other side of the table when the UK comes and says it wants to sign a trade agreement. It needs to figure out who it wants to be and what it needs before it starts those deals.

Gene Marks (00:09:16 - 00:09:45)

Yeah, it makes complete sense. They've had such turnover in their leadership as well. Then, of course, COVID got in the way, which was a very disruptive event in the country. But it has surprised me that it's taken this long for anything to happen and nothing's happened yet, and your explanation certainly does make sense. You teach two courses at Columbia, at least two courses. One of them is called Global Macroeconomic Investing. Tell me about that course. What do you teach?

Brett House (00:09:45 - 00:12:18)

Well, the raise on debt for that course is to apply ideas from the core macroeconomics course. I teach on how to understand monetary developments, fiscal developments, trade developments, growth and inflation, and capital flows between countries, and take those models and insights and develop tradable, testable theses about how public financial asset prices should evolve over time.

So, the classic case of a global macro trade that we have in mind is the move that George Soros took against the British pound in 1992, which made him an internationally renowned investor, where he understood what is known as the trilemma in international macroeconomics. It's a term defined by some work by Robert Mundell, a Canadian Nobel Prize winner, who did his work principally here at Columbia University. He noted, in part based on the example of Canada, that as an open economy in the middle part of the 20th century, long before other countries were, you could not have open capital markets, an independent monetary policy where you set interest rates for local conditions, either very low to stimulate demand and activity, or very high to clamp down on excess demand and price pressures, and set the exchange rate at the level that you want it to be. You could have two of those three things, but you can't have all three at the same time. So, he observed that in the early nineties, the UK had open capital markets, because the city of London is ten to 15% of the UK economy, you can't shut those off. It also committed to a pegged exchange rate against the deutsche mark.

At the time, that pegged exchange rate was put at too high a level for the UK economy, in part out of pride and part out of hubris, and part out of not wanting to be subservient to the Germans. And that then implied an interest rate from the Bank of England that had to be too high for the relatively weak economies that you had in Scotland, Wales, the midlands, any place outside of London at the time. And he bet, when pressed, policymakers would let the exchange rate peg go rather than push the interest rate up high enough to maintain consistency with that exchange rate. And he was right. He shorted the pound, and he made a billion dollars in a day when it fell out of the exchange rate mechanism.

Gene Marks (00:12:19 - 00:12:48)

Sure, sure. The pound itself, actually, ever since the Brexit has been hovering around like 1.3 to the dollar, it never really seems to gain strength and hasn't gained strength in a period of time. How do you feel about the UK economy? Do you feel also that there's a potential strengthening of the pound in the future? The UK economy right now has been in a recession, but are you optimistic at all about the UK?

Brett House (00:12:49 - 00:14:17)

The UK will cyclically come out of a recession as interest rates start coming down, as inflation starts coming down. But the real concern for the UK is that by engaging in Brexit, they have permanently shut themselves off over the next few decades from inward capital investment and growth potential that they would otherwise have. In contrast, here in the NAFTA region, suppliers and finished goods producers on either side of the border have access to the goods, services, and expertise of people in all three countries.

The United States has trade agreements with a range of countries around the world and regions, and that access means producers can create goods and services more efficiently, sell to consumers more effectively, and generate permanently higher rates of growth. And we're seeing that through 2023 and early 2024, in the highest productivity growth rates in the U.S. that we observe anywhere in the G7.

And the small- and medium-sized businesses that listen to this podcast are at the vanguard of some of those advances. And if anything, what would enhance those gains even more? Is if we were able to support more of those businesses in engaging in trade, because we know across Canada, the U.S., and Mexico it's largely big business, not small business, that takes advantage of those trade agreements.

Gene Marks (00:14:17 - 00:14:48)

What would you recommend that the government do to enhance that? I even raised it because your point is so right. I recently wrote a piece on the World Trade Center association who I think does yeoman's job of connecting businesses, smaller companies to potential suppliers and customers in a number of countries, particularly India, Mexico, Vietnam, some of the hotspots around the world for American trade. What more do you think can be done to get more small- and medium-sized businesses involved in international trade buying overseas?

Brett House (00:14:49 - 00:15:47)

Well, I don't think it's necessarily the government that needs to do this. Trade associations can be very helpful in explaining the rules of customs agreements and tariffs and taxes under trade agreements like NAFTA. For instance, with the renegotiation of NAFTA, the customs exemption for small shipments went up substantially between Canada, the U.S., and Mexico. If you're a small business selling your wares on Etsy or eBay or your own distribution site, you suddenly have the prospect of selling on a tariff free basis to your neighbors across the border at a much bigger scale than you had previously. So, just being aware of things like that, taking advantage of back end payment systems that allow for easier payment processing for credit cards from Canada, the U.S., or other countries, are some of the very basic things you can do to help SME's trade.

Gene Marks (00:15:48 - 00:15:59)

Do you think digital currencies will ultimately have a much bigger impact on international trade because it gets rid of the challenges that a lot of businesses have with exchange rates.

Brett House (00:16:00 - 00:16:52)

It won't eliminate the challenges they have with exchange rates. The value of currencies will still fluctuate with respect to one another, regardless of whether they're digital currencies or not, unless we all end up using the same digital currency? That's a possibility. We could see a convergence on one platform, but I think it's unlikely, in part because we will retain national currencies, because that allows us in any one country to set interest rates at a level that's appropriate for existing current local conditions. It is unlikely to be the case at any given time that growth and inflation are going to be pointed in the same direction in Canada, the states, and Mexico. And so, part of the rationale for having different currencies is so that we can set interest rates appropriate for each place.

Gene Marks (00:16:54 - 00:17:14)

Jumping around here, you had just mentioned a few minutes ago about the success of the North American Free Trade Agreement and the ease of trade that can happen between the U.S., Canada, and Mexico. Mexico is now the U.S.'s number one trading partner. I think this past year we surpassed China. Why do you think that is, and do you think that trend will continue?

Brett House (00:17:15 - 00:18:34)

Well, Canada is close on their heels. Mexico, Canada, and China are the three biggest trading partners for the US. They're closely aligned together. And the combination of Canada, the U.S., and Mexico together is particularly opposite because you have two relatively sophisticated high wage economies with a big natural resource supplier in Canada, and they are married to a relatively low wage, labor intensive economy in Mexico. That allows us to do a range of things that hit different parts on supply chains in a very complementary fashion.

So, that's part of why Mexico has become a bigger trading partner over time, because it is cost effective. They have improved their infrastructure, they've improved the quality of their labor as well, and so efficiencies have gone up. Second big issue, of course, is the huge tariffs that the Trump administration and then the Biden administration have continued to impose on China. That doesn't necessarily mean we are getting less Chinese content in our supply chains. It may mean, though, and there's some evidence to suggest, that we're simply seeing assembly of final products getting moved to Mexico or to other countries in Southeast Asia rather than happening in China itself.

Gene Marks (00:18:34 - 00:18:57)

That's interesting. You mentioned tariffs. Give me some of your thoughts on tariffs. You had mentioned, of course, the Trump administration raised tariffs against China and other countries, including Canada. And the Biden administration has kept a lot of those policies in place. Give me your thoughts on tariffs as somebody who studies this stuff. Are they good, bad, you know, positive? What impact do they have?

Brett House (00:18:57 - 00:20:33)

There's a lot of misapprehensions around tariffs. The Trump administration tried to argue that China was paying these tariffs. In fact, these tariffs are mainly being paid by American consumers and businesses. Regardless of who the tariff is imposed on initially, the costs get transferred on to final consumers here. So, Americans ultimately pay the costs, literally, for those tariffs and more broadly in terms of reduced efficiency and greater expense in accessing the goods and services that they were trying to obtain previously.

Ultimately, the key thing to know about tariffs is that they are not going to shrink the U.S. trade deficit with the rest of the world. It is a basic accounting identity on the American economy. As with all economies, that if you invest and consume more than you save as an economy as a whole, you are going to run a trade deficit and you're going to finance that trade deficit with big inflows of capital from abroad and the Chinese provide a huge amount of that financing. If you want to run a smaller trade deficit, you have to save more than you’re investing in consuming. So far, I haven’t seen any indication that Americans want to do that.

And I’m not saying that’s an unalloyed good. If the opportunities for investment are better here than they are elsewhere, we should be investing more than were saving here. We should be running a capital account surplus and a trade deficit with the rest of the world. But just know you can’t change that through tariffs.

Gene Marks (00:20:35 - 00:20:57)

All I hear and all I know, because I’m in agreement with you, that tariffs seem to be more negative than positive. Is it just a political thing? Is it just for headlines to say that we're going to impose a tariff on China and that's what we're taking back? I mean, it seems like there's very little economic benefit towards raising tariffs. Can you make a case for them?

Brett House (00:20:57 - 00:21:28)

Well, they sound like a politically expedient thing. They seem easy to explain, but it's one of those cases where the pointy headed nerdery behind them implies that their impact is distinctly different from what they seem on their surface. And that requires a little more effort to communicate. And that's why I'm so happy to be on a podcast like this, because we have to do that communication, that education constantly. Otherwise, the folks offering the easy but wrong solution end up winning the debate.

Gene Marks (00:21:30 - 00:21:56)

All right, before we get back to the U.S., just I have to also ask you, because you study the global economy, if you were running a business now and you were looking to diversify your supply chain or you were looking for more customers to expand, Brett, and you were looking overseas, what countries strikes your fancy? Where would you like to be doing business?

Brett House (00:21:56 - 00:23:25)

Well, right now, I'd like to be doing business in the United States more than any other place in the world. We had the highest growth rates in this country in the G7 in 2023. We're likely to see the highest growth rates again by consensus forecasts in 2024. Productivity is increasing. Total growth is increasing quickly, in part because immigration has also resumed into the United States from the pandemic shutdowns.

And regardless of what you hear in the forthcoming election campaign, that is a massive strength for the United States. That's adding to the total GDP pie. It's also ensuring over time, productivity is likely to increase. And the aging demographics that almost every country face are being countered to some extent here by those immigration inflows. So, I would want to be here. And that's not just because we're speaking to Americans the data support that view. And I think the potential for continued growth is stronger here than almost any place else. Second, I'd want to be in Canada. You've got also a young populace as a result of immigration. You've got nimble and big inflows of people coming in.

And the big challenge now that both countries are having is figuring out how to house them. We're not keeping up with building housing quite quickly enough to ensure that it remains affordable in both countries. Ultimately, that's a pretty good problem to have, but it's still a problem.

Gene Marks (00:23:26 - 00:24:25)

That's a great answer, Brett. You're mentioning about all the good things that are going on in the U.S. economy, and they really are. I write to the Guardian every week, and I wrote a piece a couple of weeks ago about can we all agree that the economy has been great in this country? You're never going to have a perfect economy.

One of the things that people criticize the federal government, and it's not just the Biden administration, it was going on during the Trump administration, and before that is the rising level of deficits and the impact that they have. And obviously during COVID and post COVID, trillions of dollars being spent on things like chip manufacturing, the Inflation Reduction Act, all that kind of. It's a big, as you know, it's a big political debate out there. As an economist, though, first of all, are you surprised by the growth and the economic resilience that this country has shown in light of the fact that deficits have grown so large? And as a second part to that question is, should we be worrying about deficits?

Brett House (00:24:26 - 00:26:46)

So, I'm going to flip that first question around a little bit. I am delighted that the economy has recovered as well as it has from the 2020 shutdowns. And I would attribute a big part of that to the amazing and the large and rapid support the federal and state governments provided to households and businesses to get through those shutdowns, prevent the kind of bankruptcies we saw in 2008, '09 and '10, that left permanent scars on the American economy. If you look at our trend growth path from before the 2008 financial crisis, we have never got back on it. We were permanently knocked down from it, and we did not get back up toward it at all over the last decade and a half or so.

In contrast, if you look at our pre-pandemic growth path and post-pandemic, there was a big pothole in 2020, but it was a pretty narrow one. It was deep but narrow. We came back onto our pre-pandemic growth trend quickly, and that's because we spent, and it's because we made monetary policy very accommodative. So, I think it's because we had those big deficits for a few years there that the economy survived as well as it did.

The question now is, why aren't we getting those deficits back down? Because we are out of crisis. We ended up recording 3.3% annual growth in 2023, in contrast to a recession that most economists expected. They expected that recession not because deficits were up, but because interest rates got jacked up so quickly to control inflation. We're now through the reopening phase. In a lot of respects, we're coming back to something closer to either a new normal economy or something similar to what we had pre-pandemic. And those deficits really ought to be coming down a little more quickly than the CBO, the Congressional Budget Office, expects them to do, because we don't need as much exceptional financing and support from the government now as we did in the past. And my big concern is we don't have an even gradual, permanently declining path of debt, public debt to GDP over the next decade or so.

Gene Marks (00:26:46 - 00:26:52)

We only have a minute left. So, let me just get some final words for you, though. Are deficits necessarily bad?

Brett House (00:26:52 - 00:27:06)

No, they're not. Deficits during the pandemic shutdown or 2008 are exactly what we needed. When the private sector can't meet the supply of goods and services with demand, then we need government to step in.

Gene Marks (00:27:06 - 00:27:21)

Okay, fair enough. Brett House is the professor of Professional Practice at Columbia Business School. He studies macroeconomics, international finance, and areas related to that. Brett, great information. Thank you so much for joining us. I appreciate your time.

Brett House (00:27:22 - 00:27:24)

It's great to speak. I look forward to doing it again.

Gene Marks (00:27:24 - 00:28:04)

Yep, me too. And everyone, please know that if you are looking for advice or tips or help in your business, sign up for our Paychex newsletter. Go to paychex.com/thrive. You've been listening and watching to this Thrive podcast. My name is Gene Marks. Thanks for joining us. We'll see you again next week. Take care.

Do you have a topic or a guest you would like to hear on thrive? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to. Simplify your HR pay, payroll, benefits, or insurance services, see how Paychex can help. Visit the resource hub paychex.com/worx. That's W-O-R-X.

Gene Marks (00:28:05 - 00:28:16)

Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care.

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