On the COVID-19 recession, the White House's economic agenda, the U.S.–China trade relationship, and more.
Dr. Tyler Beck Goodspeed is Acting Chairman of the White House Council of Economic Advisers. He discussed the Trump administration’s economic response to the COVID-19 pandemic with Kevin Hassett, senior adviser to National Review’s Capital Matters. The interview is edited for clarity and brevity.
1) The Trump administration has pursued an ambitious economic-policy agenda to try to grow the U.S. economy, but the media doesn’t often cover his successes. What do you think is the least known aspect of the Trump administration’s economic record?
One of the most striking economic results of the first three years of the Trump administration was the remarkable decline in wage, income, and wealth inequality, marking a complete reversal from the preceding eight years. Whereas during most of the expansion through 2016, we observed widening wage, income, and wealth inequality, in the first three years of the Trump administration — and particularly following historic tax reform in 2017 — we observed substantial declines in all three.
During the first three years of the Trump administration, real wage growth at the 10th percentile (+9.8 percent) was more than double real wage growth at the 90th percentile (+4.8 percent). Since the 2017 Tax Cuts and Jobs Act, real wealth for the bottom 50 percent of the distribution rose 28.4 percent, while that of the top 1 percent rose 8.9 percent, with the bottom 50 percent’s share of real wealth rising while that of the top 1 percent declined. The labor share of income rose, while that of capital declined. In one year (2019) real median household income rose by more (+$4,400) than in the entire 16 years through 2016 combined.
What’s especially interesting from an academic perspective is that the distribution of the aggregate economic gains from the Trump administration’s pro-growth agenda is entirely consistent with a growing body of empirical literature that reveals that the economic burden of high effective tax rates on capital and an increased regulatory burden are in fact disproportionately borne by labor. It was on the basis of this literature that in 2017, the Council of Economic Advisers projected that the business-tax changes in TCJA would raise household incomes by $4,000. By the end of 2019, real median household income was already $6,000 higher than it was in 2016.
2) How do you respond when someone asserts that the strength of the Trump economy is just an extension or spillover from Obama’s economic policies?
I think there are two ways by which this claim is disproven. The first is by looking at trends in growth rates. Economic growth is typically faster at the beginning of expansions, which is why, historically, the amplitude of an expansion is strongly correlated with the amplitude of the preceding contraction. But when we estimate trends in growth rates for a variety of macroeconomic indicators during the Obama expansion and project those trends into 2017, 2018, and 2019, we observe large residuals, indicating that growth during the first three years of the Trump administration exceeded the trend. In many instances, this is confirmed by statistically testing for slope changes.
The second, more straightforward approach is to simply look at outcomes relative to expectations. For example, in the three years before the pandemic, the U.S. economy added 7 million jobs — 5 million more than projected by the nonpartisan Congressional Budget Office in August 2016. In the first two months of 2020 alone, the U.S. economy added more jobs (+465,000) than the CBO projected would be created in the entire 12 months of 2020. GDP was roughly $300 billion (or 1.2 percent) larger than the CBO had projected, while the unemployment rate was 1.4 percentage points lower. Whether you’re a Keynesian or a supply-sider, I think this substantial outperformance is clear evidence of a shift, and there are specific, major policy changes we can point to that we would expect to have generated such a shift.
3) There’s a lot of pushback on the idea that this pandemic-induced recession is comparable to ones in the past since it didn’t come from something more systemic. Is it really fair to compare this crisis to the financial crisis of 2008-09?
It is certainly true that in contrast to 2008-09, the pandemic recession was the result of a purely exogenous shock. But I think it’s also worth noting that the severity of the adverse economic shock that hit us in 2020 as a result of the pandemic is several orders of magnitude greater than that of 2008-09, or any macroeconomic shock to the U.S. economy in nearly a century. In the spring, the Organization for Economic Co-operation and Development was predicting that the U.S. economy would decline by 12.3 percent in 2020. Whether the source of the shock is endogenous or exogenous is to a certain extent missing the point — a hit that massive would be catastrophic.
So one of the things we learned from the slow recovery after 2008-09 was the importance of preserving quality matches between employers and employees. That’s why we responded with provisions like the Paycheck Protection Program and an employee-retention tax credit — measures designed to help firms maintain payrolls and employee connections during the pandemic crisis in order to set the U.S. economy up for a faster labor-market recovery. And I think it’s that policy response, as well as the elevated labor-force attachment of the pre–COVID-19 Trump economy, that is why we observed the broadest measure of labor underutilization (U-6) declining rapidly from a peak of 22.8 percent in 2020, to 12.0 percent in November — lower than the level prevailing in July 2014, more than five years into the preceding recovery. But serious pandemic risks remain, which is why the administration continues to call for further economic support.
4) The president often talks about the “plague from China.” We all know that he’s been tough on China in the past with his controversial tariffs, but as we see the trade deficit widening, and China having a quick economic recovery following their lockdown earlier this year, how do we know the president’s economic policies toward China have been effective?
Well, firstly, I think it’s important to point out that since the Section 301 tariffs went into effect starting in July 2018, we have observed a decline in the bilateral trade deficit between the U.S. and China, from $88.7 billion ($354.8 at an annualized rate, or 1.7 percent of GDP) to $68.1 billion ($272.4 billion at an annualized rate, or 1.3 percent of GDP) at the end of 2019. The bilateral trade deficit has increased slightly during the COVID-19 pandemic, particularly as international trade in goods has recovered faster than international trade in services, but remains below pre-Section 301 levels.
More important, though, from my perspective, is that during the first three years of the Trump administration, the U.S. economy added 500,000 manufacturing jobs and nearly 12,000 new factories. This is a stark contrast to the period from the establishment of Permanent Normal Trade Relations with China through the end of 2016 as roughly 4.6 million manufacturing jobs were lost in the face of increasing import competition from a multi-trillion-dollar non-market economy. While we have a lot of work left to do to fully recover from the pandemic recession, as of November 2020 we had regained almost 60 percent of the manufacturing jobs lost in the horrific months of March and April.
In addition, the Phase I agreement we negotiated earlier this year requires structural reforms and other changes to China’s economic and trade systems in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange, along with tough monitoring provisions that provide safeguards against past unfair trade practices on the part of the People’s Republic of China.
5) Even with the strength of the labor market recovery we’ve seen so far, there’s often talk that it’s been a ‘K-shaped’ recovery, with diverging outcomes for those at the upper end of the income distribution relative to those at the bottom. How do you respond to that?
One aspect of the pandemic recession that I don’t think gets sufficient attention is the extreme regressivity of lockdowns and associated job losses, which have been disproportionately concentrated among lower-wage, predominantly service industries. Even if enhanced unemployment insurance benefits and economic-impact payments were able to make some of those individuals financially whole in the near term, there are human-capital deficits incurred from loss of on-the-job training and skills acquisition, and those deficits can compound over time.
This is why in designing the CARES Act, the Trump administration focused very hard on trying to surge fiscal support to the most vulnerable households by targeting economic impact payments to lower- and middle-income households, including those with no federal income-tax liability, and providing temporary enhanced unemployment-insurance benefits of $600 per week. As a result of this unprecedented support, we actually observed monthly income at the 25th percentile rise in the months following the CARES Act.
Longer term, the key to ensuring a balanced recovery will be that we continue the rapid recovery of the U.S. labor market we observed through November 2020. In the 7 months through November, the U.S. economy regained nearly 6 of 10 jobs lost as a result of the pandemic. This is in stark contrast to the weakest economic recovery on record during the Obama administration, which took almost 3 years to achieve the same. It took 6 years for the Obama administration to gain back all jobs lost in the 2008-09 recession, compared to a postwar average of 2 years for a full recovery. The sooner we return to the labor-market conditions that prevailed on the eve of this pandemic, the sooner we’ll be observing the kinds gains across the income distribution that we saw at the start of this year, which is why the Trump administration has been pushing hard for additional measures to support employee retention and hiring.