In normal times, a large economy like ours chugs along like a huge oil tanker on the high seas. Various forces can speed it up or slow it down, but it is mostly driven by momentum. In economic terms, such momentum is a function of the virtuous growth cycle wherein strong consumer demand creates more jobs, which creates more wage income, which creates more demand. This is particularly the case in the United States, where consumer spending is 70 percent of the economy.
When President Barack Obama took office, the tanker was, if not sinking, going backward, and it is here where the actions of presidents (as well as the Federal Reserve) matter a great deal. The housing bubble that had driven the economy since 2002 was in full collapse, with home prices falling fast. The four-point drop in the construction sector as a percentage of GDP would be equivalent to a loss of annual demand of $800 billion in today’s economy. The sudden loss of housing wealth caused an equally large hit to consumer spending.
The stimulus package and financial rescue stopped the free fall and got GDP growing again by the summer of 2009. Obviously, there are important arguments as to the effectiveness of these interventions, but our point here is that despite persistent Republican opposition, federal policy got the oil tanker moving forward again.
For more than eight years, the economy has been consistently adding jobs, and in Obama’s last year in office, payrolls expanded by 2.5 million. The unemployment rate came down from 10 percent in 2009 to 4.8 percent when Obama left office.
In other words, and notwithstanding his incessant lies about how he saved the day, by the time Trump took office, the virtuous cycle was well underway.
True, the 17 percent increase in the budget deficit last (fiscal) year is boosting growth and putting downward pressure on the jobless rate. The 49-year low in the unemployment rate is very much welcomed, especially as its benefits mostly redound to less-advantaged workers. But from the perspective of the macroeconomy, it’s a sugar high, not a lasting boost, which is expected to start fading late next year.
The advocates of the tax cut promised an investment boom, which they claimed would provide long-term benefits in the form of higher productivity growth. However, there is no evidence of this boom to date, with investment up only modestly from year-ago levels. In fact, in the last quarter, business investment grew at less than a 1.0 percent rate. Nor do we see evidence of a forthcoming boom in the various measures of business intentions or orders for capital goods, i.e., measures of future investment.
These facts imply that the growth effects from the tax cuts are largely from wealthy people spending their tax windfalls. In that regard, it’s important to consider the opportunity costs of corporate cuts and pass-through loopholes compared with a more progressive, forward-looking agenda. Had the resources lost from the tax cuts instead gone to infrastructure, quality preschool, or wage subsidies for low-income workers, that, too, would have added to demand and created jobs, but it might have also delivered longer-term benefits to the poor and middle class. Of course, Republicans would not countenance any such spending by Obama because, back then, deficits mattered to them.
There are also economic negatives to Trump’s agenda; they’re not enough to tank the tanker, but they’re problematic nevertheless. For example, stimulating an economy already closing in on full employment has led to higher interest rates (as has the Federal Reserve’s rate hike campaign that began in late 2015), and these dynamics, in tandem with his trade war, are also putting upward pressure on the trade deficit.
The impact of higher rates can already be seen in housing, as residential construction has fallen in each of the last three quarters. New-home sales are down 13.2 percent from their year-ago level. This is bad news for low- and moderate-income people, for whom rent is consuming an increasing share of their income because of housing shortages in many cities.
Higher rates, tariffs and the fact that the United States is growing faster than many of our trading partners are also boosting the value of the dollar, which tends to increase our trade deficit. The most recent data has the trade deficit running at a $650 billion annual rate, or 3.2 percent of GDP. That is up from a deficit of $502 billion in Obama’s last year in office, an especially ironic development given the importance Trump placed on the trade balance in his campaign.
The punchline is that presidents can nudge the oil tanker in the short-term with fiscal stimulus, but especially in Trump’s case, that doesn’t lastingly change its course compared with true, game-changing public investments, such as building the highways, developing the Internet, or crafting the GI bill, which helped veterans pay for college. Add in the worsening of inequality under him, the environmental degradation, a Treasury starved for revenue, and his purveying of hatred and divisiveness, and it seems glaringly clear that we’re in the midst of trading off a few quarters of juiced growth for many years of potential damage.