Magazine | August 13, 2018, Issue

Trumponomics

President Donald Trump delivers a speech on tax reform outside Cincinnati, Ohio, February 5, 2018. (Jonathan Ernst/Reuters)
The evidence so far

Our economy is strong, as nearly every new release of economic data indicates. Industrial production is up. The unemployment rate is as low as it has been in two decades. Employment rates are growing and the disability rolls are shrinking. Measures of business confidence are bullish. Stocks are up. The economy has been growing, hitting 3 percent in some quarters. Inflation, meanwhile, remains low.

Usually such good economic news redounds to the benefit of the political party in power. This rule probably applies today. Even though President Trump and Republicans are less popular than politicians presiding over robust economic expansions usually are, in worse economic conditions they would in all likelihood be even more unpopular. In polls, more voters approve of the job Trump is doing on the economy than approve of the job he is doing generally.

Republicans are talking more about the state of the economy than Democrats are — and they are taking credit for it, too. It is a tribute, they say, to Republican policies, and especially to the tax cut Republicans enacted at the end of last year and to the deregulatory actions that the Trump administration has taken.

This kind of boasting is par for the course in politics. Many economists and many conservatives insist, however, that politicians and political commentators often overstate the extent to which a president affects an economy shaped by the decisions of millions of businesses and consumers. A disinterested look at the evidence — or, at least, the most disinterested one we can offer — suggests that in the case of the Trump administration there is some truth to both the Republican politicians’ and the economists’ views, but more to the latter.

Before assessing responsibility, though, we need to get a fix on how strong the economy is. Much has been made of the unemployment rate, which is as good as it has been since the late 1990s. Needed context can be gained by looking at how trends in the growth of employment, output, and so forth have changed. When you do, you see that we are still largely on the same trajectory as we were in the late Obama years.

The last five years saw rates of economic growth, adjusted for inflation, of 2.7, 2.7, 2, 1.8, and 2.6 percent. So the economy grew faster in Trump’s first year in office than it had in 2015 and 2016, but slightly slower than in 2013 and 2014. The economy has created slightly fewer jobs per month over the last two years than it did over the previous two. The unemployment rate has been falling more slowly during Trump’s presidency than it did during the end of Barack Obama’s presidency, too. (Of course, by the time Trump took office, it was already so low it didn’t have all that much room to fall.) The slow wage growth that characterized the recovery from the Great Recession under Obama has continued under Trump.

A recent study confirms the continuity in economic performance. A team of economists looked at the combination of other countries’ economies that most closely mimicked ours in performance between 1995 and 2016. They then looked at how this combination of economies had performed after the 2016 election. The result: No detectible Trump effect, positive or negative. That conclusion feels about right.

There is room for political judgment in assessing the import of these results. On the night of Trump’s election, Paul Krugman, the left-wing economist, suggested that it would cause a crash. Obviously, that prediction was off. Compared with Krugman’s initial expectation, the Trump record has to be considered a great success. One might also have thought that the pace of an economic expansion as long as this one has been — the last recession hit its trough in mid 2009 — would be closer to a crawl at this point. That hasn’t happened either.

The fact that the economy has done roughly as well since Trump took office as it was doing before he took office suggests that Republican policies cannot yet be making much positive or negative difference to the economy. And this is what the content of those policies should lead us to expect.

The most important economic-policy change that has accompanied Republican rule was the tax cut, and its most important components were a reduction in taxes on corporate profits and an increase in the rapidity with which businesses can write off the costs of their investments. The economic rationale for this reduction in business taxation is that it will stimulate investment in the United States, which will over time make for a larger economy, more-productive workers, and higher wages than we would otherwise have had.

The qualifier “over time” in that prediction is essential: Notwithstanding the claims made by some supporters (and opponents) of the tax cuts, you should not expect these effects to appear immediately. It is simply too soon to tell whether the tax cut is having its intended effect.

The same is true of the administration’s deregulatory agenda. The Mercatus Center tabulated the net increase in regulatory restrictions during the first year of each president going back to Jimmy Carter. President Trump had the smallest increase of the bunch. Deregulation and regulatory restraint should have a positive effect on the economy in coming years, if they stick.

A less quantifiable, but not wholly unquantifiable, effect a new administration can have is on the “animal spirits” of businessmen. States that voted for President Trump seem to have performed better than states that voted for Hillary Clinton, which may be evidence that economic actors have responded positively to the signals they have been getting from a Republican Washington, D.C., and not just to the policies that have already been implemented. And even if not, anecdotes and surveys suggest that Trump may have fueled an increase in economic confidence, which should improve the economy’s performance.

But other economic policies that President Trump, congressional Republicans, or both have pursued will have a negative effect. The deficit is rising rapidly. It was $665 billion in 2017 but is projected to be $793 billion this year. That increase reflects, in part, the fact that millions of Baby Boomers are becoming eligible for retirement benefits each month. But the president has spoken out against reforming the retirement programs to contain their growth, and the congressional GOP has squelched previous impulses to enact such reforms. In addition, Republicans’ other fiscal moves — the tax cut, and increases in discretionary spending — are contributing to the growth of the deficit and therefore of the national debt.

In 2017, President Trump suggested that a short-term increase in the budget deficit would stimulate the economy. Forecasts suggest that the additional spending will provide a boost to the economy this year and next. But any economic gains could be muted to the extent that the economy is already operating at high capacity and the Federal Reserve is on guard against inflation.

Any positive effect will likely be short-term. And contrary to Trump’s remark, there is no reason to think that increased deficits will be a short-term phenomenon. The Boomers are still retiring, after all. Over time, the increase in the national debt will have a deleterious effect on the economy’s performance by crowding out private economic activity. This will ultimately decrease output, investment, and wages relative to what they would have been without the additional debt.

Among the other potential dangers to the economy posed by the Trump administration, the threat of a trade war looms largest. It is unclear how far the president will go in raising tariffs on our trading partners. But he has already imposed tariffs on washing machines, solar panels, and steel and aluminum products, and he is threatening tariffs on automobiles as well. He and some of his top advisers seem committed to escalation, which would hurt the U.S. economy by raising consumer prices and reducing the purchasing power of wages, disrupting global supply chains, and inviting a cycle of retaliation from other countries. Some of that retaliation has already begun.

The president threatens economic prosperity also by turning his back on important norms and institutions. By embracing Russian president Vladimir Putin while attacking our NATO allies, for example, Trump weakens the post–World War II liberal international order that has advanced U.S. economic growth through open markets and a rules-based trading system. Following through on his occasional threats to leave the World Trade Organization would pose a large risk to our economy and the world economy. Pressuring the Federal Reserve to keep interest rates low, as the president has started to do, could also weaken the independence of the central bank in a way that would diminish its effectiveness in fighting inflation and recessions. It’s hard to know how far the president will push on any of these, but he has the potential to do substantial economic damage.

Trump is also using the power of the federal government to intervene directly in the free market. In addition to tariff interventions, he has suggested that the Department of Energy should keep ailing coal-fired power plants from going out of business. The president has also shown a willingness publicly to target individual companies — Nordstrom, Harley-Davidson, Amazon — in an effort to affect their business decisions. This amounts to industrial policy and cronyism, and increases the amount of attention that economic actors must pay to the wishes of politicians rather than to market signals.

President Trump inherited an expanding economy. Republicans have implemented policies that should, on balance, make it modestly stronger over time. But that balance could change if the president does not restrain his worst impulses. In that case the credit Republicans are getting from voters could quickly turn to blame.

Mr. Ponnuru is a senior editor of NATIONAL REVIEW. Mr. Strain is the John G. Searle Scholar at the American Enterprise Institute.

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