February 16, 2018, by Richard J. Carroll
No president is responsible for the economy, whether good or bad, in his first year in office. So when commentators this year leap to judge Donald Trump’s economic record, whether based on market gyrations or the federal debt or inflation or unemployment, they should use the benchmarks from 2018, not 2017.
Let’s start with where the indicators are now, and then look at the president’s economic policies, to see how they give us a good indication of where the economy is going.
GDP is a decent 2.3 percent, and unemployment is a very low 4.1 percent. Though inflation rose this month more than expected, it is still a low 2.1 percent. And despite the recent volatility, the stock market is 21 percent higher than a year ago.
Some underlying factors for these numbers are reassuring, too.
Remember how some forecasters were worried that the Fed policy of quantitative easing for many years would result in substantial inflation and that it was artificially pumping up the stock market? But the surge in inflation never happened, only a minor uptick. And if the huge gains in the previous eight years were the result of QE, then the market surely would have corrected somewhere well below 20,000 long ago.
Now that the market has at least partially corrected itself, it is apparent that even the expected increase in after-tax profits as a result of the new tax law could have limited effects going forward.
Another reassuring indicator is the poverty rate, which, at 12.7 percent, is relatively low. That figure, released in September 2017, is for 2016; the rate may well be lower when the 2017 figures come out this fall, since it has been trending downward for some time. President Trump has drawn special attention to the poverty rate for blacks. It fell from 27.4 percent to 21.8 percent from 2010 to 2016. End-of-year unemployment rates for blacks have been dropping steadily since 2009, from a high of 16.1 percent down to 7.9 percent in 2016 to 6.8 percent in 2017.
Yes, there is one pretty big exception to the good economic climate: The federal debt is at 106 percent of GDP. While Trump did not face nearly as large a deficit as Barack Obama did when he first came into office ($660 billion in 2017 as opposed to $1.4 trillion for 2009), Trump doesn’t have a lot of fiscal space to work with, and even less if interest rates go up and debt servicing gobbles up a larger share of the federal budget.
But there’s a stabilizing factor to help counter the high federal debt: the reduction of consumer debt. Household debt fell from 98 percent of GDP in 2009 to 80 percent in 2016, according to data from the International Monetary Fund. The reduction of this debt was one reason for slower-than-average growth under Obama, since it meant that people cut back on spending. But it puts consumers in a much better position to fuel growth in the near future.
An external factor that is likely to be more favorable to Trump than to Obama is the rate of global growth, which jumped from 2.5 percent in 2016 to 3.0 percent in 2017 and is projected at 3.1 percent for 2018, according to the World Bank. This helps support the U.S. economy in a number of ways, especially U.S. exports. Under Obama, global growth was below average (and had been since the mid-1990s).
A number of other measures also create a favorable start for the Trump economy, including improved energy independence and a more solid banking sector, with all large banks passing stress tests required under the 2010 Dodd-Frank Act.
Though it’s premature to draw any meaningful conclusions about Trump’s economic record from any of these indicators, we can look at the policies he has pursued and assess what the likely effects are going to be. Let’s focus on three areas: taxes, deregulation and trade.
The tax law that went into effect this year cuts marginal rates, including the top rate, from 39.6 percent to 37 percent and the corporate tax rate from 35 percent to 21 percent. Some deductions were capped at lower levels. The Congressional Budget Office estimated that the tax cut would add $1.5 trillion to the national debt.
By itself, any tax cut, like any spending increase, will stimulate economic growth, at least temporarily. But if the cut is poorly designed or carried out in an unfavorable economic context, then it can cost more than it’s worth.
As for the Trump tax cut, the context could not have been less favorable for five reasons.
First, the economy is near full employment at 4.1 percent, so the prospect for job gains is not that great.
Second, economic growth has already been accelerating in 2017 and early 2018 with little or no benefit from a tax cut.
Third, there is a historically high concentration of wealth at the very top tier of the population, so a tax cut that favors high-income earners, as this one does, will worsen that wealth distribution and be less effective in generating consumption.
Fourth, the high federal debt means that any cut would need to generate a great deal of taxable growth to offset the revenue losses to the treasury and reduce debt as a share of the economy. Rising debt in a full employment economy is not good.
And fifth, effective tax rates (rates actually paid) on individuals (13.5 percent) and corporations (18.6 percent) are not as excessive as statutory rates suggest.
In fact, this climate would have been much more conducive to a tax increase (at least on higher-income individuals) than a cut. The resulting debt reduction would have put the economy on a much stronger footing with greater fiscal space in the event of a downturn, space that the U.S. doesn’t currently have.
Trump stated at the Davos economic forum that he had exceeded his campaign promise to eliminate two regulations for every new one by removing a staggering 22 regulations for each new one. What really counts is if the right regulations are eliminated and if the effective ones are supported and properly enforced.
For example, reducing regulatory compliance costs for small banks is a good thing, something the previous administration also supported. But reducing bank capital requirements in a way that leads to taking big, ill-advised risks is not.
The same is true for environmental regulations. If rules interfere with business activity without much environmental benefit, they should be revised or eliminated. But we are seeing rules being rolled back to allow more air pollution and climate-change emissions from power plants. Combine this with increased tariffs on solar panels (a form of reregulation), and we can expect health and other quality-of-life costs down the road.
If deregulation is excessive, creating additional risk in the financial sector, and the tax cut proves ineffective, then we could find ourselves in another boom-and-bust situation like the one in the George W. Bush administration. As was the case then, the chain of events would take a few years to play out, and after a possible re-election campaign.
The trade deficit has been rising, from $521 billion in 2016 to $571 billion in 2017. If the U.S. could get a better outcome from trade deals, that would be great. But in the case of the North American Free Trade Agreement, for example, no reputable study attributes much job loss to it, and consumers would have to pay more if it is scaled back.
The biggest Trump trade move has been to pull the U.S. out of the Trans-Pacific Partnership. That will likely have a negative effect on the U.S. economy. Already China has moved into the space the U.S. has vacated, through the Regional Comprehensive Economic Partnership, and has been negotiating for access advantages in Asian markets, particularly in Japan, over U.S. competitors.
These changes in policy will eventually have substantial effects on the economy, but it will take a few years. From an economist’s viewpoint, it’s hard to argue that such a strong shift in course was warranted — particularly since the Obama economy produced benefits for eight years and counting.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Richard J. Carroll is an economist for international financial institutions including the World Bank. He is the author of “The President as Economist: Scoring Economic Performance From Harry Truman to Obama.”