At Tuesday night’s State of the Union speech, President Trump will tout all the wonders the economy has achieved under his auspices. Here’s a little cheat sheet for putting in context some of the claims he’s likely to make.

Economy overall

Trump is likely to argue that the economy is back, it’s morning again in America, etc. This narrative ignores the economic tailwinds Trump sailed in on.

  • The economy under Trump is nearly identical to the economy the last couple of years under President Barack Obama. Full stop.
  • The level of the stock market is higher, and the level of gross domestic product is higher. But if you go by levels, then the current president is almost always a winner. That’s why you look at growth instead. Under Trump, the economy has been growing at rates we haven’t seen since … 2015.
  • We’re still expanding, unemployment is still falling, wages are rising modestly, consumer confidence is quite strong. All good stuff. There are some measures, though (job growth), for which the numbers have arguably disappointed. Listen for which measures Trump cites and how much context he offers regarding what the trends looked like before his presidency.

Source: Bureau of Labor Statistics. Numbers are year-over-year changes from each December, not seasonally adjusted.

Stock markets

Trump loves, loves, loves to brag about how great stock markets have performed since he became boss. Markets took a nose dive Tuesday, but that likely won’t stop him. Briefly, a few reasons that bragging about equity markets is boneheaded:

  • The market is not the economy. Can’t say this enough.
  • Stock prices are a claim on the after-tax profits of a firm. Trump just signed a bill that cut taxes on companies. This means their after-tax profits should rise even if companies do absolutely nothing to expand or become more efficient. If stocks didn’t rise, then, something would be very, very wrong.
  • That said, presidents have limited control over long-term market trends.
  • That said, if we were were to judge presidents by stock performance, Obama would actually look better than Trump, in the year following their respective inaugurations.

Data from Yahoo Finance.
  • If you want an even more embarrassing comparison, markets in the rest of the developed world are doing a touch better than they are here. It’s not that we’re doing badly, stocks-wise; we’re just not anomalous. It’s hard to attribute the market boom almost everywhere to Trump, particularly if you take his zero-sum view of the global economy.

Source: MSCI. EAFE index covers developed markets, excluding North America.


Trump will probably talk about running the government like a business and tightening up government spending. He may also mention his administration’s forthcoming budget. Don’t be fooled by talk of fiscal responsibility.

  • Deficits are about to explode. For most of the past 70 years, deficits pretty closely tracked how well the economy was doing; when the job market was bad, deficits went up, and vice versa. Not the case anymore. Deficits and unemployment decoupled during the Obama years and are about to get way, way worse thanks to the $1.5 trillion hole the tax law just blew in the budget.

Courtesy of Goldman Sachs Economic Research.
  • Why you should care: As we learned long ago from John Maynard Keynes, fiscal expansion during a good economy is not a great idea. It leaves us with fewer bullets when we actually need them — i.e., when, inevitably, the business cycle turns south again.
  • Trump may argue that he’s going to cut deficits because his new tax law will generate such gangbusters growth. Again, don’t be fooled. Not one independent tax or budget analyst has predicted that the tax bill will reduce deficits. The forecasts vary only in how much bigger they say deficits will get.
  • More generally, my rule of thumb is that the more growth a politician promises, the worse his economic plan probably is. That’s because the politician probably needs ginormous growth to paper over really, really expensive policies.

Tax cuts vs. worker compensation and investments

There’s been lots of news coverage of firms allegedly passing on their massive tax cuts to workers, or announcing major investments in the United States motivated by the tax cuts. Trump loves to amplify these stories, and we may hear some of them Tuesday night.

  • Note that most companies touting how they’re applying their tax windfall to boost employee compensation are giving a one-time bonus, despite getting a permanent tax cut.
  • These bonuses, wage increases and investments might have happened anyway; it’s hard to say. Sometimes, they had even been announced well before the tax bill passed in December. Companies may be looking for good publicity and ways to ingratiate themselves with the White House.
  • One way that the tax law could have indeed led to bonuses would bode very poorly for workers. As tax law professors Daniel Hemel and David Kamin have explained, corporations may be gaming the effective date of the corporate tax rate change and pulling forward worker compensation — comp that they would have doled out later on anyway — in order to achieve significant tax savings. That’s because the deduction for employee compensation was worth more at the end of 2017, when marginal tax rates were higher, than in 2018 onward.
  • Most of the tax cut windfall will benefit owners of capital, not workers, though the economic literature offers different estimates of the exact breakdown. A lot of companies have already announced new rounds of share buybacks and dividends in any case.