Trumponomics Is Failing on Growth
After campaigning as a businessman who would usher in a new golden age of growth in America, US President Donald Trump's economic track record in 2017 proved disappointing. Despite large tax cuts and little standing in the way of Trump's deregulatory agenda, the US economy has performed no better under his administration than under the last.
WASHINGTON, DC – US President Donald Trump and his Secretary of the Treasury, Steven Mnuchin, have promised an economic miracle. They argue that when the United States adopts their policies, it will consistently achieve annual economic growth above 3%, or even above 4%. After a year of being in charge, pushing hard on deregulation, and getting what it wanted in terms of tax cuts, how is the Trump team doing?
We are still in the early days, but the results so far have been disappointing. And the US’s medium-term prospects for sustained growth could be endangered if Trump pursues the policies he claims to want.
Trump has repeatedly argued that America’s overall economic performance in 2017 should be seen as the direct result of his policies, and he has made a big deal out of the third-quarter growth rate, which was initially reported as 3.3%, then revised down to 3.2%. Yet, in the fourth quarter, growth was down to 2.6%, and initial estimates suggest that overall growth for the year will not surpass 2.3%. That is lower than what was achieved under former President Barack Obama in 2014 (2.6%) and 2015 (2.9%).
In fact, under Obama, the quarterly growth rate surpassed 3% seven times, and even reached 4.6% on two occasions. From the third quarter of 2009, growth was positive in every quarter, save two. But not only was headline growth sturdy under Obama; his administration also presided over considerable job growth – the economy added more than two million jobs annually in seven out of his eight years in office – as well as falling unemployment and higher labor-force participation.
Far from a miracle, Trump has failed to deliver any kind of improvement to economic growth. To understand why, it helps to remember that Trump has not actually done much in office. Notwithstanding his constant bragging about deregulation, the total economic impact of his regulatory repeals has been trivial relative to the size of the economy.
Moreover, the tax cuts that Trump signed into law at the end of 2017 will have very little positive impact on growth. The tax package is primarily about redistribution from middle-income households – particularly those in high-tax, Democratic-leaning states such as New York and California – to the richest Americans.
People who own capital that is already in place – such as large buildings in New York – will do well. But the law does not offer much of an incentive to invest in new capital, either by launching a new company, developing new products, or investing in new plants and equipment. Furthermore, as I pointed out at a recent Intelligence Squared US debate in New York, the law may actually have a negative effect on research and development, which is a key driver of long-term growth in the US.
Looking at the 2017 data, there is no sign that business investment ticked upward under Trump. Yes, this is a volatile data series, because it rises and falls with the usual course of events. But it is also another area where Obama set the bar high during his two terms.
The most positive thing that can be said about Trump’s first year of economic policymaking is that he did not deliver on his campaign promise to disrupt trade. The North American Free Trade Agreement (NAFTA) remains intact, as do trade relations with China and other major US partners. The administration did impose tariffs in January on solar panels and washing machines, but those are small relative to the size of the economy. As a result, Trump has not caused a massive, self-inflicted recession, and we should perhaps congratulate his team more often for avoiding that scenario.
Then again, we are entering a period of heightened Trump-related risk. Having terminated the Deferred Action for Childhood Arrivals (DACA) program last year, Trump has put 800,000 young people who were brought to the US illegally as children in danger of being thrown out of the country.
Given that these are highly productive people who contribute heavily to the US economy, Trump’s approach could have dire economic, not to mention human, consequences. Trump and his allies are also pursuing sharp reductions in legal immigration, which would reduce the US’s medium-term growth prospects, perhaps significantly.
Trump has not abandoned his threat to rip up NAFTA, either. If he does take any steps in this direction, it will not be helpful to the US economy. Ironically, it could also do great damage to the Mexican economy, likely resulting in increased undocumented migration to the US. Without any such disruption, however, demographic trends suggest that migration from Latin America to the US will continue to decline steadily.
The biggest danger that Trump poses concerns financial deregulation. Both the Trump administration and the Republican-led Congress are attempting to roll back protections against systemic risk that were put in place after the 2008 financial crisis. Unfortunately, these kinds of attempts to juice the economy typically end badly. When George W. Bush’s administration did the same thing, we were left with the Great Recession.