President Donald Trump entered the White House promising to reinvigorate the American economy. One year on from his inauguration, has he done so?
President Donald Trump’s election in the United States and the subsequent year of governance has been unprecedented in the history of the American presidency in many ways. His conduct as President of the United States (POTUS) as well as many of the policy agendas he has pursued has been a radical departure from previous Presidents, particularly in the modern era.
As with any world leader, among the foremost concerns when assessing their performance in the job is assessing the shape of the economy under their leadership. This is especially true of someone like Donald Trump, who had a long, high-profile business career prior to being elected as POTUS. Opinion polling and commentary alike have generally shown Trump as doing better on economic matters than for other aspects of his job. A Gallup survey showed that 45% of Americans approved of his job handling the economy, compared to an overall approval rating of 35%. This is understandable, given the relatively strong position the US economy finds itself in. President Trump and the White House have been quick to seize on this as proof of the success of his economic policies. For instance, White House Press Secretary Sarah Huckabee Sanders compared the Trump and Obama administrations on the economy in a Tweet on November 10:
Trump’s Economic Agenda
Trump’s economic agenda, in contrast to his populist rhetoric in campaigning, has been mostly boilerplate Republican economics in place since the Reagan presidency. In some instances, Trump has shaken up economic policy, particularly concerning trade. During the primary campaign and into the general election, Trump campaigned on a populist and protectionist agenda. He was dismissive of free trade deals, which he decried as being unfair toward the United States. To this end, he left the TPP free trade deal upon entering the White House. The North American Free Trade Association deal (NAFTA) is also looking imperilled. Ongoing talks have stalled and the prospects of the deal continuing are looking unlikely.
On top of this, Trump has been engaged in an ongoing war of words with China over what he deems as ‘unfair’ terms of trade. More tangibly, the Committee on Foreign Investment (CFIUS) has recently blocked the $1.2 billion sale of Moneygram, a money transfer business, to Chinese entrepreneur Jack Ma. The deal was blocked on national security grounds, though it is unclear what is meant by this.
In many other key areas of economic policy, however, he has been far more in line with Republican orthodoxy. The recent tax cuts Trump enacted is a perfect example of this. The tax reforms which were passed in December were the most significant reforms in decades. In total, $1.5 trillion dollars’ worth of tax cuts was enacted. The scope of the reform was comprehensive, covering many distinct aspects of the tax code. A few measures stand out among the many changes. First and foremost, the corporate tax rate was reduced massively. Previously, the corporate tax rate stood at 35%. Under the GOP bill, the rate has now been reduced to 21%. Prior to this change, the US corporate tax rate was among the highest of OECD countries. The new tax rate now places the United States at the lower end of taxation in this group.
The income tax rate for individuals is also lowered across the board. This rate is lowered to 37% at its highest from the previous top tax rate of 39.6%. There are many other provisions in the bill which are beneficial primarily to high-income earners. For instance, income taxes on appreciated assets and estate taxes have been eliminated. In addition, real estate investors will still be able to trade properties tax-free. This is in contrast to investors in other assets such as machinery or livestock, who will have to start paying taxes on these goods. Middle-income earners, relatively speaking, receive much less benefit from the tax bill than do higher income earners.
The anticipated success of the bill is predicated on the benefits trickling down from the wealthiest and from corporations to the rest of the workforce and population at large. Following the passing of the bill, several large companies announced that they were going to give their employees bonuses of varying sizes. Among these companies were firms such as AT&T and American Airlines, who have pledged bonuses of $1000 for each of their thousands of employees, at a cost of hundreds of millions to each of these businesses. Overall, more than 100 companies have signalled their intent to either give employees bonuses or a pay raise as a result of the tax reforms.
While many economic indicators look strong for Trump at present, there are some signs of trouble ahead. For instance, the numbers of jobs created has slowed in the past 12 months relative to previous years. To an extent, this is inevitable – the unemployment rate currently sits at around 4%, a relatively low number. As the labour market tightens, fewer jobs will be created. However, the under-employment and labour utilisation rates remain stubbornly high, significantly above pre-recession rates. Another pressing issue is anaemic wage growth. While GDP growth has been strong at around 3%, the rate of increases in wages has not followed suit. This figure has lagged behind overall economic growth for several years at this point. As a result, many Americans are not sharing the full benefits of what is otherwise quite a strong economy. Stronger wage growth may occur as a result of the tax bill, but it is uncertain.
Trump’s role in the current state of the economy
A key question to ask when assessing Trump’s success as an economic manager is assessing how much of the economy’s performance is down to Trump’s leadership, or whether it was a continuation of trends seen under the Obama administration. Many economists and experts believe that Trump has been fortuitous in inheriting a steadily improving economy from President Obama. The above figures that have been cited make for encouraging reading. To be sure, President Trump deserves some credit for the position in which the economy finds itself in. However, much of the credit given to Trump lies equally with the previous Obama administration. There are several reasons why this is the case.
Firstly, as libertarian economist James Pethokoukis points out, the majority of Trump’s core proposals for the economy have not been legislated yet, or have been abandoned altogether. Massive-scale infrastructure investment, for instance, has not begun, nor does it appear to even be on the horizon. Apart from the tax, relatively little of Trump’s economic agenda has come into play. It is unlikely much else will happen before the midterms apart from the tax cut, given the precarious nature of the Republicans’ hold on the Senate.
Yet, even if Trump had made several substantial policy moves, these generally take multiple years to take effect. Given Trump has only been in office a year, and his sole major economic policy action was only enacted last month, it is far too soon to credit the positive economic outlook at present to Trump. Many of the factors Trump claims credit for, such as jobs growth and unemployment, have been as strong or even stronger and trending in a positive direction since the second term of the Obama administration. Jobs growth in particular, which Trump claimed was the strongest in years in 2017, lagged behind 5 of the last 7 years of the Obama administration.
The Federal Reserve and Global Economy’s impact on the US
Much of the pro-Trump analysis also discounts the enormous role the Federal Reserve plays in shaping the United States economy. This has been the case for a long time – it is not a new development, and is one that is as applicable to the recovery under Obama as it is to the current economic fortunes under Trump. Particularly since the Great Recession of a decade ago, the Federal Reserve plays an outsized role in influencing the economy compared to what it previously did. One of the ways which this has occurred is the massive increase in assets owned by the Reserve, up to $4.5 trillion in 2017 from around $850 billion a decade earlier. This is due to the Reserve’s policy of quantitative easing which helped to sustain the post-recession recovery. More generally, the Federal Reserve has increased the scope of its regulatory powers, increasing with it the overall influence it has on the American economy.
Finally, it is important to consider the state of the global economy. For the first time in several years, most of the world’s economies are showing sustained positive growth. Trade has increased at its highest rate in the last five years. Even the Eurozone, which has been mired in recession and anaemic growth for the better part of a decade, is showing signs of vitality.
While on the surface the economy looks strong, there are underlying factors that must be considered which show signs of fragility in the US economy. The lack of wage growth, as well as under-utilisation of labour, are two such signs. On top of this, Trump’s unpredictable stances on the issue of trade add to the volatility of the United States economy. It is therefore difficult to parse how much credit Trump can claim for the state of the economy at present. There are many factors outside of any president’s control which contribute to economic performance. The ongoing trends in growth and recovery established during the Obama administration must also be factored in. With all these mitigating factors, it is difficult to portray President Trump, at least at this point in time, as being the main, or even a significant factor in the relatively strong position of the current US economy, as much as Trump himself would insist otherwise.