How good is the Trump economy?

Let’s start with the obvious:

1.  Trump’s campaign promises were absurd.  He said he’d pay of the national debt in 8 years.  When asked how, he replied “trade”.  Just two days ago, he again claimed that tariffs were helping to pay off the national debt.  The truth is that Trump is conducting the most irresponsible fiscal policy in all of American history.  Because neither the Dems or the GOP are willing to cut spending, Trump’s deficit spending will lead to much higher taxes and slower growth in the future.  But that’s not Trump’s problem.

2.  Trump’s claim that he reduced the unemployment rate from somewhere around 20% or 40% to 4%, almost overnight, doesn’t even pass the laugh test.

3.  Trump is making the trade deficit “worse”, the exact opposite of his promise.

4.  Job growth is no better than under Obama.

5.  He promised 4% RGDP growth, we have 2.7% so far.

So if the economy was as awful under Obama as he claimed during the campaign, then it’s still very bad. However, if we look past Trump’s silly promises, there is some evidence of economic improvement:

The growth rate of 2.7% over the past 6 quarters exceeds the 2.1% average during the Obama recovery.  On the other hand, growth averaged 3.0% during 8 quarters from 2013:Q2 to 2015:Q2, and GOP supply-siders were not lauding that achievement at the time.  Thus the recent surge is clearly not statistically significant.

On the other, other hand, I do think the recent tax changes have boosted growth.  I had expected growth to slow as we approached full employment.  It was slowing in 2016.  We don’t have RGDP futures markets, but I’m pretty sure that growth has been higher than was expected 2 years ago.  Stocks responded as if the tax bill was pro-growth.  The unemployment rate fell by more than expected.  And I’d expect above trend growth to continue for a few more quarters, before slowing sharply during 2019.  So on balance, there is some evidence of an improved economy.

To summarize:

The hyperbolic claims of the Trumpistas are laughable.  We are still recovering in much the same way as under Obama, just a bit faster.  Claims that the U-3 unemployment rate were meaningless and that the true unemployment rate was anywhere from 20% to 40%, have been quietly shelved.  Like everything else with Trump, his economic claims are deeply dishonest, even by the standards of American political discourse.  (Commenters occasionally tell me that other politicians say things like, “I’ll pay off the entire national debt in 8 years through trade.” False, other politicians don’t say things like that.)

It’s far too soon to make any overall judgments about the effects of Trump policies.  Throughout history, governments tend not to end well when led by demagogues that rely on continual, non-stop lying, fake news, demonizing foreigners and minorities, seeking “enemies” in the media and anyone else who dares to disagree, and no respect for the rule of law.  Indeed I know of no such government in all of human history that ended well.  Maybe Trump will be an exception, but let’s wait and see before making that judgment.

PS.  Off topic, the decision to remove Trump’s star from the Hollywood Walk of Fame was a mistake.  Trump is even more famous than when his star was first placed on the sidewalk.  Yes, he’s a bad person, but so are lots of other famous people with stars on the pavement.  More importantly, this decision is a win for the vandals, and will encourage more vandalism in the future.  Incentives matter.


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21 Responses to “How good is the Trump economy?”

  1. Gravatar of rayward rayward
    7. August 2018 at 09:55

    This article about the American stock market is an eye opener: https://www.nytimes.com/2018/08/04/business/shrinking-stock-market.html The article is chock-full of unsettling facts. Here’s one: “In 2015, for example, the top 200 companies by earnings accounted for all of the profits in the stock market, according to calculations by Kathleen Kahle, a professor of finance at the University of Arizona, and Professor Stulz. In aggregate, the remaining 3,281 publicly listed companies lost money.”

  2. Gravatar of Liberal Roman Liberal Roman
    7. August 2018 at 10:06

    @rayward,

    I always find these articles stupid. Because you can do the same type of argument the other way, but no one does because it’s not alarmist. By that I mean, you can say “The bottom X # of companies account for all of corporate losses. The rest 3,XXX companies are all profitable.”

    If you take out the top TWO HUNDRED performers, of course the remainder are you going to look awful. I am pretty sure this would be the case at any time in history of the stock market.

  3. Gravatar of Cyril Morong Cyril Morong
    7. August 2018 at 10:08

    The WSJ reported yesterday

    “Through July, U.S. employers added an average of 215,000 jobs a month to payrolls. That is a marked acceleration from the 184,000 jobs added on average during the first seven months last year. And, well above the 165,000 average monthly employment growth economists surveyed by The Wall Street Journal predicted for 2018 when asked in January.”

    So if it took time for his policies to start affecting the economy, this seems like a positive. But I would not claim to know exactly when any of his policies began to have an impact

  4. Gravatar of LK Beland LK Beland
    7. August 2018 at 10:18

    The prime-age employment rate stands at 79.4%. It once reached 81.8% in the US (https://fred.stlouisfed.org/graph/fredgraph.png?g=kNf4)

    Internationally:
    Canada 83%
    UK 84%
    Germany 85%
    Japan 85%
    Sweden 86.3%
    Switzerland 86.5%

    The prime-age employment rate won’t reach the late 1990s level before another 4 years. It won’t reach world-leading levels before a decade.

    There’s still plenty of room for growth through job-creation.

  5. Gravatar of Jonathan Jonathan
    7. August 2018 at 10:19

    You say:”Trump’s deficit spending will lead to much higher taxes” but that is probably wrong. There are still the same demographic and technological trends that lead to secular stagnation. We need more stimulus and more spending and Trump is a populist in the right time to be a populist.
    I know you must say that the Fed can replace Trump’s stimulus with its own stimulus if needed in the future. But the Fed people are too coward to do the required aggressive stimulus in times of secular stagnation and low-interest rates. It’s only psychology in the end and you keep ignoring that. We need courage and it will not come from the Fed, so at least we found a brave president. Stupid but (or therefore) brave.

  6. Gravatar of Christian List Christian List
    7. August 2018 at 10:31

    I’m surprised how well the economy is doing under Trump. My money was on full disaster and still is, but I’m also really bad at investing so don’t listen to me.

    I do not understand why you consider Trump’s exaggerations an essential problem. It’s absolutely not a problem. The real problems are those lies and beliefs, which are spread by a closed phalanx of scientists, politicians, and the media. This is absolutely not the case with Trump’s exaggerations and lies, so I do not see where the problem is. It’s just hysteria and TDS.

    Trump’s deficit spending will lead to much higher taxes and slower growth in the future.

    One of the next Presidents should just pull of “an FDR” and (fully or partially) default on the debt. This worked back then, it would work again.

  7. Gravatar of E. Harding E. Harding
    7. August 2018 at 13:44

    Commenters occasionally tell me that other politicians say things like, “I’ll pay off the entire national debt in 8 years through trade.” False, other politicians don’t say things like that.

    No; they regularly do. Not that that’s a good thing, though.

    continual, non-stop lying, fake news, demonizing foreigners and minorities, seeking “enemies” in the media and anyone else who dares to disagree, and no respect for the rule of law

    Sadly, both parties have devolved into this. It’s a very sad thing to behold.

    The hyperbolic claims of the Trumpistas are laughable. We are still recovering in much the same way as under Obama, just a bit faster.

    Bingo.

    and GOP supply-siders were not lauding that achievement at the time.

    That was due to the unemployed going back to work.

    Indeed I know of no such government in all of human history that ended well.

    FDR?

    Like everything else with Trump, his economic claims are deeply dishonest, even by the standards of American political discourse.

    Maybe.

  8. Gravatar of E. Harding E. Harding
    7. August 2018 at 13:45

    Trump is conducting the most irresponsible fiscal policy in all of American history.

    Without a doubt.

    And I’d expect above trend growth to continue for a few more quarters, before slowing sharply during 2019.

    Same.

  9. Gravatar of Viking Viking
    7. August 2018 at 13:46

    It is possible to pay down much of the debt in 8 years. It would take about a 50% cut in spending across the board, including “entitlements”. Neither Republicans nor Democrats have the stomach for that. That simple step would not pay down all of the debt, but probably more than half over 8 years, depending on the fiscal multiplier. For 2017, spending was about 3.9T and revenue 3.2T. Decreasing spending to 2T would result in a surplus of 1.2T.

    I could reduce my spending 50%, I have demonstrated that before during my adult life, but with the American time preference and general limited grasp of economic realities, even the 20% across the board cut to balance the budget during a boom is labeled “extremism”.

    https://www.cbo.gov/publication/53919

    https://en.wikipedia.org/wiki/United_States_federal_budget#/media/File:Social_Security_Worker_to_Beneficiary_Ratio.png

  10. Gravatar of Randomize Randomize
    7. August 2018 at 14:36

    LK Beland,

    Given the unique structural unemployment in the US, I wouldn’t presume that it’s possible for us to match other countries for prime-age employment.

    The U-6 unemployment rate might be a better measure of how much room we have left to grow. Just eyeballing the chart, it looks like we last hit our current U-6 in May, 1999 and the rate bottomed out a year later before turning back upward into the recession.

    https://fred.stlouisfed.org/graph/?g=kKzM

  11. Gravatar of dtoh dtoh
    7. August 2018 at 15:37

    Scott,
    I think the higher growth is due to two factors…

    1) Tax cuts (which I think will have a more permanent effect on growth than you do.)

    2) The economy is still in a recovery phase. If you consider the recovery in terms of LFPR rather than U3, I think one would expect to see higher growth until we get back to trend.

    3) Regarding the deficit, it’s highly sensitive to the growth rate. If you’re wrong about the growth rate, you will also be wrong about the deficit. BTW – remind me why deficit spending is a bad thing.

    4) Can you name any government (led by demagogues or otherwise) in the history of the world that ended well?

  12. Gravatar of B Cole B Cole
    7. August 2018 at 15:39

    I agree with this post, except for the characterization of a “Trump deficit”.

    As we all know, the federal budget is a creature of Congress, the House and the Senate.

    Evidently, running large national deficits is embedded deeply into the policymaking DNA of the House and the Senate.

    Indeed, macroeconomic academics need to consider monetary policy in light of perpetual national federal deficits.

    True, one can posit that the Federal Reserve should target a particular nominal growth rate or level. But beyond that, should quantitative easing be a permanent aspect of monetary policy, so as to offset the growing burden of national debt? Is that what is happening today in Japan? China?

    Would a reliance on money-financed fiscal programs, rather than borrowing, be a sensible idea?

    The last GOP president to balance the federal budget was Eisenhower. If the US can get away with “printing money” rather than borrowing….

  13. Gravatar of Viking Viking
    7. August 2018 at 16:57

    Hear, hear MMT! Have a joint! And don’t inhale, like the last reluctant budget balancer didn’t! And he was to the right of the current GOP on illegal immigration. But we still fantasize the GOP has moved to the right!

  14. Gravatar of ssumner ssumner
    7. August 2018 at 20:02

    Cyril, But that job growth is no higher than under Obama. The real argument is that job growth would have slowed without the tax cut.

    Christian, There is almost no chance that the Supreme Court would allow the President to default on the debt. Won’t happen.

    Harding, Yeah, FDR was just like Trump.

    dtoh, Agree with your first two points, but we won’t get back to pre-2000 trend for LFPR.

    3. Excessive deficits are bad because they lead to higher future taxes.

    4. Bill Clinton.

    Ben, The President must sign the spending and tax bills, and he wants even bigger tax cuts and bigger spending increases than Congress has provided. How can any sane person not blame Trump?

  15. Gravatar of Philo Philo
    7. August 2018 at 23:14

    “Once a star has been added to the Walk, it is considered a part of the historic fabric of the Hollywood Walk of Fame,” the [Hollywood] Chamber [of Commerce] said in a statement. “Because of this, we have never removed a star from the Walk.”

  16. Gravatar of Benjamin Cole Benjamin Cole
    8. August 2018 at 02:55

    “The President must sign the spending and tax bills, and he wants even bigger tax cuts and bigger spending increases than Congress has provided. How can any sane person not blame Trump?”—-Scott Sumner.

    There is mass insanity in DC!

    “The constitutional provision making Congress the ultimate authority on government spending passed with far less debate. The framers were unanimous that Congress, as the representatives of the people, should be in control of public funds—not the President or executive branch agencies”–official history, Congress

    –30–

    “With Congress possessing the sole power to draft and pass the budget and laws of the land — leaving the president limited to signing or vetoing said laws — no one group can hold sway over the direction in which the United States is governed. (Even when a single party controls the executive branch and both the Senate and House, that party’s competitors still have a say in how Congress acts.”–Congress for dummies.

    –30–

    Yes, Trump could refuse to sign the spending/tax bills, in which case federal spending/taxing just goes on automatic (I forget the terminology).

    In theory, if the debt ceiling is not raised, you might get a government shutdown and that happened once.

    I suppose you could posit Trump invited an alcoholic to happy hour, by not barring the door to the bar.

    I interned for the CBO in the 1980s, even talked with Alice Rivlin.

    Not much has changed. I would guess 95% of the federal budget is “locked in” through “iron triangles” of interest groups, Congressional committees and executive agencies, a type of perma-government, or shadow government.

    Trump? You think he has a powerful and effective and shrewd legislative liaison operation going on? If so, he kept that a secret.

    Trump strikes me as undisciplined. Congress perhaps less so.

  17. Gravatar of dtoh dtoh
    8. August 2018 at 04:13

    Scott,
    On LFPR. Three things.

    1) Part of the LRPR drop was demographic (aging population, etc.) so you’re right about that coming back….. however…

    2) Higher growth because of the tax cuts may create some opportunities that could draw people into the labor force and offset the demographics.

    3) Things that could happen (but probably won’t) that could raise the LFPR. A) Raise the age for social security benefits. B) Stop government supported student loans. C) Impute gift tax on free housing provided to adult millennials by their indulgent parents.

  18. Gravatar of ssumner ssumner
    8. August 2018 at 07:36

    dtoh, I agree there are things the government can do to boost LFPR

  19. Gravatar of LK Beland LK Beland
    8. August 2018 at 09:49

    Randomize

    “The U-6 unemployment rate might be a better measure of how much room we have left to grow.”

    Agreed. It *might*. I’m not sure what the proper indicator is–LFPR, prime-age employ/pop, u-3, u-6, etc.). You are right that u-6 points to 1-2 years left of above-long-term-trend growth. Other indicators point to almost 10 years left. I wouldn’t venture making a firm prediction.

    But in some sense, it’s an issue of relatively little consequence. The issue of primary importance is ensuring that no deep recession comes about–i.e. stable nominal conditions. And right now, the Fed/government are letting ngdp growth run above the post-2009 trend (y/y at 5.4% compared to 4% trend). It certainly looks like the situation could become unstable.

    In my view, in the next few years, unstable monetary conditions are more likely top slow down the rate of job creation than demographics.

  20. Gravatar of dtoh dtoh
    9. August 2018 at 16:01

    Scott,

    >> 3. Excessive deficits are bad because they lead to higher future taxes.

    Or more future government borrowing or less future government spending.

    Also why are more taxes a bad thing? Maybe a government is better at spending money than its citizens are?

  21. Gravatar of Jeff Jeff
    10. August 2018 at 05:06

    Most government debt is not indexed, and much of it is long term debt. So we can effectively default on it via a burst of inflation. To the extent that the debt is held by foreigners, defaulting on it via inflation is a way to screw the foreigners, which always has a certain amount of domestic political appeal.

    Of course, this requires a compliant Fed. But that might not be a problem.

    Suppose that some random event causes markets to wonder about the quality of Treasury debt. What would happen? The increased risk premium means real interest rates on US debt go up relative to other kinds of debt, and nominal rates go up even more as markets anticipate high US inflation.

    Then the Fed has to either allow a recession or Depression or they can validate the market’s expectations of high inflation. If you had to choose, which would you take? It’s not at all clear that Depression is preferable to inflation, especially if you can convince yourself that the inflation will only be temporary.

    Of course, if you look at TIPS break-even rates, it would appear the market finds my scenario above to be highly unlikely. That puzzles me. It’s as if people think that huge tax increases and spending cuts are more likely, which I find hard to believe.

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