In a recent essay, Paul Krugman provided what one might characterize as a Democratic response to the continued good economic news. Not surprisingly, he suggested that the current growth is not too different than that of the Obama years and gave scant credit to Trump’s specific policies, claiming a victory for deficit-spending Keynesianism. But data suggest otherwise: There are strong reasons to believe that specific Trump-administration policies have driven our ongoing economic expansion.
To minimize the contrast with the Obama years, Krugman notes, “The U.S. economy grew 3.2 percent over the past year, a growth rate we haven’t seen since . . . 2015.” This picks out the one year during the Obama expansion that had a growth rate over 2.5 percent while ignoring that for the entire six-year expansion period, 2010-2016, growth barely averaged 2.0 percent, and was only 1.6 percent in 2016. Thus, the Trump years have been much more robust.
Krugman admits his post-election forecast that the expansion would be brief was wrong because he underestimated the size of Trump’s deficit spending. This doesn’t explain why he had to wait two years to make this judgment and why he didn’t make it at the time Republicans passed their 2017 tax-reform package. Indeed, his fellow New York Times economics writer, Eduardo Porter, wrongly claimed that the package would have no positive impact on the wages of workers, something I disputed at the time that has been proven wrong by subsequent events. The Trump expansion has not only been more robust than during the Obama years, but has also substantially raised wages, especially for lower-paid workers.
Krugman is also wrong to claim that our current economic growth resulted from standard Keynesian deficit spending. Surprisingly, both consumer and government spending grew at slightly slower rates during the first two Trump years than during the last two Obama years. Instead, it was changes in capital investment and exports that fueled the Trump expansion.
Krugman understated the capital-spending expansion using an older study that cut off data in the third quarter of 2018. If he had used available data that included the fourth quarter, he’d have found that capital spending has remained quite robust. More generally, Krugman does not mention that, for the last two years of the Obama administration, businesses seemed to go on strike, resulting in negative growth of nonresidential spending on property and equipment. By contrast, each of such spending increased by more than 5 percent in both 2017 and 2018.
Krugman may be correct that the 2017 corporate-tax cut had little to do with the subsequent capital expansion, but the Trump administration’s regulation reductions are another, more likely culprit. Regardless, the capital expansion has been the result of specific policies, rather than of simple deficit spending.
For instance, Krugman dismisses trade considerations. “The strength of the economy doesn’t reflect a turnaround of the U.S. trade deficit, which remains high,” he writes. This ignores underlying trade dynamics: Imports rise when the economy expands while they decrease when the economy contracts. That was certainly the case in the last two years, which saw substantial growth in imports. What was striking, however, was the robust increase in exports during the last two years after they declined during the last two years of the Obama administration. Export increases have been especially strong for goods sold (4.7 percent in 2018), arguably the result of changes in U.S. trade policies. They have ensured that the trade deficit increased by less than would have been predicted given such robust economic growth.
Critics like Krugman should stop attempting to minimize the economic expansion and the role of Trump’s trade and regulatory policies in precipitating it. Indeed, Krugman admitted that, at the beginning of Trump’s presidency, few mainstream economists believed unemployment could be lowered further without causing substantial inflation and many wrongly associated damaging effects with large government deficits. Critics would be better served if they focused on the potential adverse long-term consequences of deregulation and the sacrificing of too much tax revenue to gain a capital-spending stimulus that might not last much longer. There should be no question of the economic benefits of Trump’s policies during the last two years.