How will history judge Trump’s economic policy?

Michael R. Strain Contributing columnist

President Donald Trump claims to have a “magic wand” that allows him to push the economy’s growth rate above an annual rate of 4 percent in the second quarter of 2018. This is one of the president’s more colorful public statements taking credit for the economy’s performance. Such statements are as common as they are overstated.

Trump isn’t alone in exaggerating the effect a president can have on the state of the economy. The public debate often forgets that the economy is shaped by powerful global forces — peace and turmoil between nations, technological advancement, migration, international trade — and by the decisions of millions of households and businesses.

So I’m not terribly surprised that the economy today looks pretty similar to the economy at the end of the Barack Obama administration. For example, the unemployment rate stands at 3.9 percent, but its 6 percentage-point steady decline began during Obama’s first term.

Or consider the most recent gross domestic product release, which found the economy growing at an annual rate of 4.2 percent. That’s fast growth, to be sure. But the economy enjoyed an annual rate of growth higher than 4 percent during four quarters of Obama’s presidency.

Trump has been president for 19 months, during which time the economy added an average of 189,000 jobs per month. In the final 19 months of the Obama presidency, the economy added 208,000 jobs per month — basically no difference.

I’m going to stop the comparisons here. It’s not good practice to analyze economic data grouped by presidential administration, precisely because the president does not control the economy with a wand, magic or otherwise. And the gist of the main economic indicators confirms the story told by the three I’ve discussed above.

One exception to the continuity is business sentiment. Optimism among small-business owners spiked when Trump was elected and is at its highest level in nearly a half-century. It is reasonable to conclude that this has fueled hiring and investment to some degree.

The president also can claim some credit for the economy’s performance because of increases in federal spending and the new tax law. Both serve as short-term fiscal stimulus, increasing the size of the economy. The nonpartisan Congressional Budget Office projects that spending increases alone will boost the size of the economy by 0.3 percent in 2018 and 0.6 percent in 2019. Fiscal stimulus at this point in the business cycle is ill advised, but it will juice the economy nonetheless.

The new tax law is much more than fiscal stimulus, of course. By increasing its after-tax profitability, the Trump administration is correct to argue that the law should increase investment, both because U.S.-based businesses will invest more and because businesses will be more likely to invest in the United States than overseas. Over time, we should expect additional investment to increase productivity and workers’ wages.

Has that predicted investment response come to pass? Investment has strengthened under Trump. This could result in part from stronger business confidence and the expectation of significant deregulation. The stronger trend for investment seems to have begun under Obama, so it is likely in part a result of the overall strengthening of the economy.

And enough time has passed since the enactment of the new tax law that some of the increase could result from stronger investment incentives. This would not be surprising. But even if we see some buds flowering in the data, it’s too early to expect the full effect of the investment incentives to drive significant changes in business decisions.

As for the negative economic consequences of the president’s policies, those, too, may lie mostly in the future. By financing his tax law and spending increases with debt, the president stands to undo much of the benefit of stronger investment incentives.

We don’t yet know how far Trump will go in any trade war, but the negative effects could be significant. The president’s comfort with crony capitalism and industrial policy will hurt economic efficiency. His attacks on international institutions and immigration could weaken significantly the long-run performance of the economy as well.

On balance, how will history judge Donald Trump’s effect on the economy? My crystal ball is cloudy. But I see lightning striking in its clouds.

Michael R. Strain Contributing columnist
https://www.yourdailyjournal.com/wp-content/uploads/2018/09/web1_strain.jpgMichael R. Strain Contributing columnist

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute and editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute and editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”