This time last year, the best news on the world economy came from outside the United States. China had restored its grip after two financial mini-crises; emerging markets were booming; France was celebrating labor reform delivered by a pro-market young president. Meanwhile, U.S. growth was lackluster and the dollar was weakening. President Trump was not making America great again.
Fast forward one year, and the picture is different. U.S. growth came in at 4.2 percent in the second quarter, trouncing the 1.5 percent recorded in the euro zone and the 3 percent in Japan. U.S. unemployment stands at a rock-bottom 3.9 percent , less than half the rate of the euro zone. The S&P 500 stock market index is up more than 9 percent this year, while European and Japanese markets have fallen slightly, and China has taken a big hit. Fully 64 percent of Americans tell Gallup that now is a good time to find a quality job.
So is Trumponomics working? With one significant caveat, the answer is no. For one thing, Trump’s trade policy is turning out to be worse than expected. For another, the growth surge mostly reflects a temporary sugar high from last December’s tax cut. Economists are already penciling in a recession for 2020.
The caveat has to do with corporate investment. Some aspects of the tax cut were straightforwardly appalling: At a time of toxic inequality and declining intergenerational mobility, inheritance taxes ought to be increased, but Trump cut them. However, the reduction in the corporate tax rate, coupled with incentives for businesses to invest more, has boosted spending on R&D, information technology and other machinery. Extra investment should make workers more productive. It might even shift U.S. growth to a higher trajectory.
Economists are notoriously bad at predicting productivity spurts. So you can’t rule out the possibility that the Trump investment incentives are hitting the economy just as a new wave of IT innovations is ripe for deployment. Sensors, cameras and predictive software may upgrade everything from ports to power grids. Translation programs and collaboration apps such as Slack and Dropbox may boost teamwork across time zones and language barriers.
The question is whether the expected productivity boost will outweigh the drag from the tax cut’s other consequence: a huge rise in federal debt. For what it’s worth, most forecasters are pessimistic. The extra $1 trillion or so of federal debt will have to be serviced: Today’s sugary tax cuts imply tax hikes in the future. Likewise, the corporate investment incentives are temporary: They may simply bring investment forward, depriving tomorrow’s economy of its tech caffeine jolt. Following this logic, many Wall Streeters expect a recession once the sugar high dissipates. The Tax Policy Center estimates that gross domestic product in 2027 will be the same as it would have been without the tax cut. There will be no growth to compensate for extra inequality and debt.
And that is without considering the harm from Trump’s trade wars. In Europe, Trump has browbeaten U.S. allies and reserves the right to beat them up further; the only “gain” is a discussion of a new trade deal that was on offer anyway before Trump’s election. In the Americas, Trump has arm-twisted Mexico into accepting a new version of NAFTA that is worse than the old one, and demands that Canada sign on. Henceforth, cars made in North America must comply with complex local-content rules. This will raise their cost, harming U.S. motorists and the competitiveness of U.S. carmakers in other markets.
But the greatest damage stems from Trump’s trade war with China. His opening demand — that China abandon its subsidies for strategic high-tech industries — was never going to be met by a nationalistic dictatorship committed to industrial policy. His bet that tariffs will drive companies to shift production to the United States is equally forlorn. If manufacturers pull out of China, they are more likely to go elsewhere in Asia. And even if some manufacturing does come to the United States, this gain will be outweighed by the job losses stemming from Trump’s tariffs, which raise costs for industries that use Chinese inputs. In short, Trump isn’t helping the American workers he claims to speak for. Instead, he is battering the rules-based international system that offers the best chance of constraining China.
Phases in economic history are remembered by their labels: the go-go ’60s, the stagflationary ’70s and so on. The current populist era in the United States will turn out no better than populist projects elsewhere: in Britain, where a self-harming experiment in deglobalization has dragged down the national growth rate; in Italy, where expensive promises to voters could bring on a debt crisis. So do not be surprised if the populists are temporarily popular: Popularity is what they crave most, after all. But recall that, everywhere and throughout history, the populists’ folly is unmasked in the end.
Sebastian Mallaby, author of “The Man Who Knew: The Life & Times of Alan Greenspan,” is the Paul A. Volcker senior fellow for international economics at the Council on Foreign Relations and a contributing columnist for The Post.