June 29, 2020
In one of Donald Trump’s greatest con jobs, he has convinced most Americans that he is a genius at managing the U.S. economy. In fact, Trump has pursued disastrous policies; the economy grew despite his initiatives, not because of them. It’s a testament to the intrinsic strength of the American economy that Trump’s misguided ideas did not derail it (until he blew the response to the Covid-19 pandemic).
On the economic front, Trump is like the Wizard of Oz, all show and no substance, a master of illusion.
Nevertheless, 50% of voters approve of Trump’s handling of the economy, while 45% disapprove, according to a recent New York Times/Siena poll. And 44% of Americans think that Trump is “better on the economy”, compared to 38% for Joe Biden, based on a CNBC poll released last week.
That’s ironic, since Biden played a key role in the Obama Administration’s rescue of the U.S. economy after the financial crisis of 2008–09. President Obama has never received due credit for his policies, which laid the foundation for the nation’s recovery from that disaster…as well as solid economic growth during his second term. As his Vice President, Biden quarterbacked the successful effort to save the American auto industry, which is the largest source of manufacturing jobs in the country.
The Trade Wars Have Damaged the U.S. Economy
Meanwhile, Trump’s two signature economic policies, his endless trade wars and his massive tax cut, have been colossal, expensive failures. And Trump’s attacks on immigration threaten one of the country’s key competitive advantages — its relatively younger population — and its long-term growth prospects.
When Trump launched his trade wars, he promised to revive American manufacturing and end unfair Chinese trading practices, such as forcing companies to disclose their proprietary technologies. Democrats, as well as Republicans, support those goals. However, rather than focus on China, Trump levied stiff tariffs on reliable trading partners, such as Mexico, Canada and European nations, who have generally played by the rules. Trump could have assembled a strong coalition of commercial allies to confront the Chinese. Instead, the President needlessly antagonized our traditional allies.
These trading spats have been profoundly disruptive for American and European car manufacturers with U.S. operations, in particular. Did you know that BMW and Mercedez-Benz are the two leading auto exporters from the U.S.? They employ a lot of American workers. Because of Trump’s public bashing of companies and his tariffs, U.S. based car producers have been very cautious about making new investments. That’s true for other industries, too.
The American industrial sector actually went into recession in mid-2019. Although that partly reflected a slowdown in China, the main causes were the disruptions caused by Trump’s tariffs and his abrupt changes in trade regulations.
Businesses have been whipsawed by the constant changes and chaos; they cannot make plans, so they hold back on making investments. The overall economy grew, because services continued to flourish, but that did not help states like Michigan, which relies on manufacturing.
Americans, not China, Foot the Bill for Tariffs
The trade war with China has also imposed large costs on American farmers. In retaliation for American tariffs, China slashed its purchases of American soybeans, pork and other agricultural products, inflicting huge losses on American farmers. The Trump Administration has orchestrated several bailout packages for farmers, to the tune of about $30 billion, to offset the damage. American taxpayers have footed the bill for that. We have subsidized Trump’s courting of the farm vote.
Furthermore, American consumers are paying for the tariffs that Trump has imposed — not Chinese companies, as Trump has claimed. The firms based in America that import goods from China have to pay the tariffs, and they usually pass on the costs to their customers. So far, the bill for those tariffs has amounted to about $55 billion. That’s a tax on U.S. consumers, which cuts their spending power and weakens the economy. After all, consumer spending represents about 70% of the U.S. economy.
It’s worth remembering that Trump bears complete responsibility for this fiasco. During the 2016 election, no other major politician — Democrat or Republican — was clamoring for a trade war. Major U.S. companies have pleaded with the President to lift the tariffs, but Trump refuses to listen.
The 2017 Tax Cut — The Grand Illusion
Trump justified his massive tax cut in 2017 for corporations and the top 0.1% of Americans by saying that it would lead to large increases in capital investment by U.S. firms. Trump also claimed that the tax cut would pay for itself, because it would boost economic growth to 3 or 4%. That would be unusually high for a mature economy like the U.S.
Neither promise came true. Most firms used their “savings” from their lower tax rates to buy back huge amounts of their stock, not to invest in their operations.
And, as Democrats had predicted, the tax cut caused the federal deficit to explode. The gap between the government’s revenues and expenditures has almost doubled, to $1 trillion in fiscal year 2020 from $585 billion in 2016, mostly because of the tax cut.
Trump had taken a sound idea — lowering corporate tax rates to reasonable levels — and pushed it too far. The President gave a massive gift to his donor base, with huge tax cuts for the wealthiest Americans, but for most people, the effect was tiny. As a result, the tax reductions did not even trigger much consumer spending, which might have helped the economy.
Deficits Still Matter
After running large deficits to stimulate the economy after the financial crisis, President Obama trimmed the gap to about 3% of gross domestic product. As a rough rule of thumb, a government should not run a deficit higher than the typical growth rate of its economy. So for the U.S., a 3% deficit is a reasonable target. But under Trump, the shortfall has soared to 4.8%, which is not sustainable.
And that’s before the massive spending programs to help the millions of Americans who are unemployed because of Covid-19.
Although Republicans (and unfortunately, many Democrats) no longer seem to care about deficits, the bill for this profligacy will come due. Eventually, Congress will have to raise taxes or cut spending to bring down this structural deficit which Trump has created. The U.S cannot defy the laws of economics indefinitely. Just ask the Italians and the Greeks about that.
It’s the Economy, Wise Guy, Not the Stock Market
One of the key mistakes that Trump has made is that he confuses the performance of the stock market with the real economy. A stock market boom is very important for Trump’s donor base, of course, but it does not directly affect the lives of most Americans, since they don’t own stock. After all, about 40% of Americans have less than $400 in the bank. They don’t care about the swings in the Dow.
Trump has also exaggerated his economic record, claiming “we’re having the best economy…in the history of the country.”
GDP has grown at 2.7%, which is a good growth rate, but not exceptional, and it’s below Trump’s 3–4% target. During Obama’s second term, the economy expanded at a solid 2.3% a year, despite the lingering effects of the Great Recession.
Unemployment fell to 3.7% under Trump, which is historically low. But that is a continuation of the favorable trend begun during Obama’s tenure, when unemployment fell five points, to 4.8% from 10%.
Faster Job Growth Under Obama
The economy performed better under Obama on two key metrics that do affect most Americans: job growth and wage growth. During Trump’s tenure, the economy has produced 193,000 new jobs per month. Under Obama, the figure was 216,000. Real wages grew 1.3% per annum during Obama’s second term. However, real wage growth has stagnated during the Trump administration, at 0.4%. That’s nothing to crow about.
Donald Trump has not engineered an economic miracle, and his policies have not led the U.S. to achieve unusual growth. Instead, Trump has created headwinds for the economy, with his reckless tax cut and foolish trade wars.
It’s a fair bet that Joe Biden would follow a pragmatic approach and handle the economy better than Trump. Let’s hope the voters give Biden the chance to do that, starting next year.