If Donald Trump has his way in November's presidential election, he'll coast to victory on the strength of the economy.
The U.S. job market, President Trump tweeted in September, currently has its "all time best unemployment numbers, especially for Blacks, Hispanics, Asians & Women." Those numbers, which only grew stronger in the final months of the year, followed the Tax Cuts and Jobs Act (TCJA), the 2017 law that Trump has, with typical hyperbole, described as "the largest package of tax cuts and reforms in American history."
Even as the president faced a trial in the U.S. Senate, the stock market was up, unemployment was down, and average families were earning more than ever before. The week the Senate held its final vote in the impeachment trial, he delivered a State of the Union address that opened with an extended brag about the strength of the nation's economy, which he called "the best it has ever been." That is why Trump's 2020 campaign message can be condensed into a single tweet: "How do you impeach"—or in the electoral case, beat—"a President who has helped create perhaps the greatest economy in the history of our Country?"
For his Democratic rivals, the answer is to downplay the economy's gains or to deny its strength altogether. At one Democratic primary debate last year, candidates were asked what they would say to a voter who dislikes Trump but likes his economy. Sen. Bernie Sanders (I–Vt.) rejected the premise, saying that for ordinary people, the economy "ain't great." Sen. Elizabeth Warren (D–Mass.) dismissed economic gains as a "rise in corporate profits" that are "not being felt by millions of families across the country." Former Vice President Joe Biden insisted, "The middle class is getting killed. The middle class is getting crushed."
In the run-up to the 2020 election, then, even the economy has become a partisan issue. As Amber Wichowsky, a political scientist at Marquette University who has studied how economic issues affect voters' political views, recently told The New York Times, "Partisans have a strong desire to interpret the economy in a way that benefits their 'team.'"
Yet there are real, nonpartisan answers to be found in the countless economic data points that paint a picture of America's economic health. And those data tell us that in many respects, the state of our economy is strong in ways that can be attributed to Trump administration policies. The stock indices are at historic highs. JPMorgan Chase predicts another 8 percent increase in the value of the S&P 500 in 2020 as the economy "reaccelerates." Meanwhile, Goldman Sachs Research forecasts steady U.S. gross domestic product (GDP) growth of 2.3 percent through this year.
At the same time, the economy has notable weaknesses—some of which are a product of Trump's actions as well. In short, neither simple partisan narrative tells the full story.
The job situation under Trump is a clear success. The unemployment rate just hit a 50-year low, real wages are up, and job creation looks good—especially when compared with expectations. In its latest forecast before the 2016 election, the Congressional Budget Office (CBO) projected that the economy would add 1.9 million jobs in the next three years. In fact, according to data from the Bureau of Labor Statistics, the first 35 months of the Trump administration saw the economy add almost 6.7 million jobs, beating the forecast by more than 350 percent.
That figure should be kept in perspective. As it happens, during the same period in President George W. Bush's second term, the economy gained 6 million jobs. In the aftermath of the Great Recession, during the first 35 months of President Barack Obama's second term, the economy added 6.8 million jobs.
Overall, though, Trump's numbers are very good, especially considering that the economy is in its 11th straight year of expansion. That's no small achievement: The longer an expansion lasts, the harder it is to add jobs. And during the last 50 years, the economy has experienced a contraction, on average, every seven years. Under Trump, this run of economic expansion has lasted far longer than is typical.
Taxes and Trade
These strong numbers have prompted many to declare the 2017 TCJA, which slashed tax rates for individuals and corporations while increasing the deficit by an estimated $1.5 trillion over a decade, an unmitigated success.
Although it was unwise to lower taxes without significantly cutting spending, the legislation itself was probably positive on net—particularly its reduction of America's unusually high corporate tax rate. Defenders, however, made a mistake by framing the tax cut as a major relief for the middle class.
The middle class wasn't and still isn't shouldering very much of the income-tax burden: Most income taxes are paid by higher-income earners. In 2013, the share of federal income taxes paid by the highest-earning 10 percent of the population was roughly 70 percent, while the share of federal income taxes paid by the bottom 90 percent of income earners was about 30 percent, according to research from the Tax Foundation based on IRS data.
In addition, other key provisions of the law—like doubling the standard deduction and adding new tax credits for the middle class—were never likely to provide much economic boost.
A more promising approach to producing growth would have been to pair the corporate tax reduction from 35 percent to 21 percent with a provision allowing firms to immediately write off the cost of new equipment. In theory, those changes would spur investments, causing wages over time to rise. At the time, however, conservative advocates for the tax cuts argued that reductions in the individual side were necessary to get the support necessary to pass such large corporate tax relief. The corporate tax cuts were viewed as politically impossible without some reduction for the middle class.
It didn't work out that way. As American Enterprise Institute's James Pethokoukis recently wrote, "The Trump tax cuts are looking like failed politics. They're not popular, polls suggest, and most people don't think they got a tax cut."
One possible reason for the disappointing public reaction: dramatic predictions made by many proponents that couldn't possibly hold up. For example, Trump surrogates and other supporters said the TCJA would, among other things, produce annual economic growth from 3 percent to 6 percent, boost average household incomes by at least $4,000 a year, and pay for themselves by increasing revenues overall. They also often implied that the impact would be immediate. The optimism was reinforced when a number of firms announced bonuses and higher pay initiatives shortly after the passage of the tax reform.
Compared with the administration and its boosters, most economists and investors had much more modest expectations for the TCJA. They knew that it would take time for the corporate tax cut to deliver growth and wage increases and that the payoff might become visible only months or years down the road. That's because the best case for the corporate tax cuts was never that companies would use their extra cash in the short term to raise workers' wages, extend paid leave, or offer other employee benefits. Nor was it that they would suddenly add many more workers to their payrolls.
The real case for the corporate tax cut was more subtle: Lowering marginal tax rates on investment gives companies an incentive to earn more taxable income, thus leading them to invest in other businesses as well as in upgrading and expanding their facilities. This additional investment, in turn, raises workers' productivity and ultimately leads to higher wages. But it's a process that takes time.
Nearly two years later, we can start to look back and determine if any of these things have happened. The U.S. economy definitely grew—but not at the 3 percent (or more) annual rate predicted by the administration. In 2018, the year after the TCJA was adopted, the economy grew by 2.9 percent. This was an improvement from 2016 and 2017 but roughly in line with 2014 and 2015. We don't yet have final numbers for 2019, but GDP growth is expected to be around 2.2 percent, giving an average growth rate of 2.5 percent for Trump's first three years in office—similar to the first three years of Obama's second term.
How much of the growth in output can be attributed to the tax cuts? Most estimates suggest that in 2018, the TCJA increased GDP by 0.3 percent to 0.5 percent, while the CBO projects that the increase will be 0.6 percent for 2019.
When it comes to investment growth, assessing the impact of the law gets more complicated. But the answer matters a great deal, since a boost in investment is one of the main channels by which the tax reform was supposed to deliver economic and wage growth.
As it turns out, investment did accelerate significantly in 2018. Wages also grew by 3 percent—a boost that mostly benefited workers at the bottom of the income distribution. Yet that's a far cry from the 7.8 percent wage growth that would have been needed in order for the TCJA to deliver on its promise of a $4,000 increase in average household income, according to The Wall Street Journal.
Moreover, the investment uptick didn't last. Data from the Federal Reserve of St. Louis Research Division show that capital investment growth has been falling since fall 2018. Correlation is not causation, so this doesn't mean that the tax cuts are the reason investment fell. But it does raise some doubt about claims that the cuts would cause a significant increase in investment—an outcome that proponents of the corporate tax cut, including me, predicted.
Several things could be going on. First, it's worth noting that in both pre– and post–tax cut forecasts, business investment had been projected to slow down. In other words, investment in 2018 was beating the forecast. So this could simply be a return to the predicted trend. Second, the growth in capital expenditures could be taking longer than expected to materialize. Third, the effects of the tax cuts on investments could be undercut by non-TCJA factors, such as lower oil prices or the grounding of Boeing's 737 MAX airliners.
Another strong countervailing force, of course, could be the president's trade war. According to the Tax Foundation, the tariffs have reduced long-run GDP by 0.26 percent. The erratic announcements of tariffs, the resulting increase in costs for many American producers, and the predictable retaliation by foreign governments all slowed global growth and negatively affected business confidence in 2019. In turn, many companies were obliged to freeze projects or to defer investment plans. One recent study from the Federal Reserve found that any benefits U.S. manufacturers might have gained from reduced foreign competition were probably canceled out by the effects of retaliatory tariffs abroad and more expensive goods at home.
In other words, without the TCJA, the trade war—which has produced a recession in manufacturing—would almost certainly have dampened capital expenditures even further than it did.
Debt and Deficits
Trump's trade war isn't the only policy this administration has pursued with the potential to moderate or cancel out the beneficial effects of the 2017 tax cuts. Overspending is another.
In 2016, right before Trump took office, federal spending was $3.9 trillion. Two years later, that number had risen to $4.1 trillion. During the same period, the federal deficit grew from $585 billion to almost $1 trillion—with trillion-dollar deficits expected to continue for years to come. Total expenditures for this year include at least $28 billion in bailout payments to farmers to make up for the pain inflicted by the trade war.
The president is not fully responsible for this spending frenzy; Congress has failed to abide by its own budget processes for years and has made a series of bipartisan deals to raise both domestic and military spending. But Trump's utter lack of interest in fiscal discipline—including repeatedly declaring that he won't touch Social Security and Medicare, the biggest long-term drivers of the federal debt—seems to have encouraged Republicans in Congress, who were happy enough to overspend anyway, to completely abandon any pretense of fiscal responsibility.
All of this fueled an expansion in the federal debt from $19 trillion at the beginning of 2016 to $22 trillion at the end of 2018. It's unclear how big a toll this red ink has taken on the economy, but I am quite certain it has had one. In the wake of the financial crisis, economists Carmen Reinhart and Kenneth Rogoff published a paper called "Growth in a Time of Debt," which concluded that when gross debt as a share of GDP increases beyond 90 percent, economic growth slows. The paper was widely cited among commentators, academics, and politicians in the debate surrounding austerity and fiscal policy in debt-burdened economies. Unfortunately, some data errors allowed skeptics to discredit Reinhart and Rogoff's findings.
A recent review of the literature, however, reveals that high government debt ratios do have negative effects on economic growth rates. The question of how much growth is lost from higher debt remains a matter of debate. But there's little doubt that over time, carrying large amounts of public debt has damaging economic effects.
What about deregulation? In his first week in office, Trump issued Executive Order 13771, titled "Reducing Regulation and Controlling Regulatory Costs," which requires that "for every new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process."
The White House claims that "under the President's leadership, the Administration has cut 8 and a half regulations for every new rule, far exceeding his promise to cut two regulations for every new one." The Council of Economic Advisers (CEA) estimates that after five to 10 years, this new approach to federal regulation will have raised real incomes by $3,100 per household per year.
This sort of claim is hard to check, and it seems overly optimistic. Still, Federal Register data compiled by the Center for Regulatory Studies at the Mercatus Center at George Mason University, where I work, reveals that the total number of federal regulations has indeed stalled in recent years.
That is a positive trajectory compared to the Obama administration. Yet simply counting the rules doesn't fully capture their impact. The number of economically significant regulations is growing more today than it did under President Ronald Reagan. It may be that the Trump administration picked the low-hanging fruit in 2017 and 2018 and has now reached its deregulatory potential. But this raises some doubt as to how much wage growth we can really expect to result from Trump's deregulation efforts.
Does It Matter?
If economic performance is what ultimately decides national elections, November should be a cakewalk for Trump. While the 2017 tax cuts didn't deliver the results promised by the president and his magical-thinking supporters, the administration has delivered some continued economic expansion, some job creation, and some investment growth, followed by some wage increases. Time will tell how durable those benefits are.
Does it matter, politically speaking? In fact, there is some reason to think that voters prioritize economics above other issues. According to a new survey from CNBC, when asked what "matters the most to you right now," 24 percent of Americans cite jobs and the economy, first among all responses, ahead of health care, immigration, and the environment.
Historically, the state of the economy is one of the best predictors of presidential elections. And today, most people are feeling pretty good: Only 21 percent of Americans say they're worse off now than they were four years ago. Although the latest RealClearPolitics polling average shows that 56 percent of Americans think the country is going in the wrong direction, that result is better than the 62 percent Americans who were pessimistic in November 2016.
Yet according to the CNBC poll, only 34 percent of Americans say the next presidential election will be about the economy. The current levels of ideological division may seriously diminish the potency of "the state of the economy" as a predictive variable in 2020, since partisan voters are likely to interpret the economic information available to them in a way that suits their political beliefs. The truth is that no one knows what the economic performance of the last four years means for the president's re-election chances.
Trump's legacy will probably not depend on how the economy fares during his presidency. I suspect he will be remembered more for his lack of ethics, his juvenile language, his online bullying, his callous immigration policy, his admiration for foreign despots, his personal insecurities, his payment of hush money to a porn star—and, of course, for being impeached.
But there is little question that the Trump economy is, at least as of the first days of 2020, doing well. While presidents tend to have less control over economic outcomes than they—or the public—like to believe, at least some of the current success is due to policies implemented by this administration. Then again, Trump inherited an economy that was already in reasonably good shape. He has mostly managed not to mess it up.
For all of Trump's many failures to grasp economic principles (especially when it comes to the trade war), he exhibits no desire to be a full-scale social engineer. His worst economic instincts reflect standard-issue 17th century mercantilist fallacies. Humankind has flirted with, and often fallen head-over-heels in love with, these fallacies for centuries. They are damaging. They are maddening. And they're inexcusable in the modern era. But they don't represent the sort of calamitous wholesale restructuring of the economy promoted by the likes of Sens. Bernie Sanders and Elizabeth Warren.
In short, the president is a protectionist spendthrift. But he is not a socialist or a grand economic designer of any kind. And these days, that goes a long way toward keeping entrepreneurs and investors happy to create and compete in U.S. markets.
This doesn't make Trump a free marketeer or even a decent president. But it does help to explain the continued support he receives from the business community, which in turn explains—at least in part—the stock market's current buoyancy.
We are lucky to have an incredibly rich, resilient, and robust economy. The American economic system is not a delicate flower rooted in shallow or nutrient-poor institutional soil. Instead, it is a hardy oak, deeply planted in ground that's fed and watered by well-maintained institutions under which property and contract rights are reasonably secure and risk taking and innovation are generally rewarded. As long as our economy continues to be open and free, it is likely to keep growing.