Trump, Year Two: The Economic Record
When President Trump took office January 20, 2017, I asked "What if Trump Skeptics, Like Me, Turn Out to be Wrong? I wrote then:
In short, it seems clear that the more dire predictions made back in 2017 about how the economy would immediately tank were based more in animus to Trump than in prescient analysis. Indeed, a lot of the economic patterns like growth and unemployment for the first two year of the Trump presidency look a lot like a continuation of patterns from the last few years of the Obama presidency. What about the specific questions I asked back in January 2017?
On the issue of manufacturing jobs, total US manufacturing jobs bottomed out at 11.4 million in January 2010, had risen to 12.3 million by January 2017, and were up to 12.9 million by the end of 2018. A pattern set in the Obama administration has continued along with the continued growth of the US economy. .
On the rate of economic growth, the pattern looks much the same as it did in Obama's second term. Trump has had one quarter of growth at a rate faster than 4% (2018, Q2), but there is no particular sign of a jump in growth rates or productivity.
On trade issues, Trump just talked about protectionism in 2017, but actually started implementing it in 2018. However, one of the ironies here is that with the threat of greater protectionism about to kick in, it appears that a number of companies have accelerated their trade plans, boosting their imports ahead of future tariffs. Thus, the US trade deficit will probably grow in 2018 compared to 2017. I'm not someone who thinks the bilateral US trade deficit with China should much of a focus, but for those who do, 2018 will mark the biggest such deficit ever. Thus, by one of President Trump's preferred measures, the size of the trade deficit, his policies are not a success in 2018. For those of us who worry about a disruption of global trade patterns, the bigger worries are coming in 2019.
On carbon emissions, US carbon emissions have been falling, not rising, while much of the rest of the world has been headed in the other direction. The lesson I would draw here is that too many people put too much faith in signing international agreements as the path to reducing carbon emissions. Focusing on government and industry actions, and how they shape prices, is considerably more important. For the US, I'd trade all the signatures on international climate change agreements for an actual carbon tax.
The ratio of federal debt held by the public to GDP doubled from 36% back in 2008 to about 72% by early 2013, This debt/GDP ratio edged up only a little more to 75% of GDP when Trump took office in early 2017, and had reached 76% by late 2018. But the Historical Tables released from Trump's Office of Management and Budget a year ago estimated that the budget deficit would rise from 3.5% of GDP in 2017 to 4.2% of GDP in 2018 and 4.7% of GDP in 2019 (Table 1.3). The real concern here is that in the middle run, starting about a decade from now, US spending is likely to rise substantially with the aging of the US population, and rather than address or postpone that issue, the $100 billion or so per year in tax cuts in the 2017 Tax Cuts and Jobs Act will make that middle-run debt crisis come a little sooner and be harder to address.
On the issue of the Federal Reserve, it seems fair to say that it has maintained its independence, but also to say that President Trump has challenged its independence in a way that hasn't been seen in the US since President Nixon pressured then-Fed chair Arthur Burns in the lead-up to the 1972 election--and Nixon's pressure was exerted mostly behind the scenes. The Fed has been systematically raising interest rates since December 2015, and if economic growth continues through 2019, I'd expect at least one more increase in 2019, too.
The number of Americans without health insurance hasn't budged much since President Trump took office.
Looking ahead at 2019 and 2020, it seems to me that the US economy faces several meaningful sources of near-term risk. Any of these would have a certain irony for the Trump presidency, because they would result in part from issues that President Trump has played a role in creating.
1) A recession could occur if the Federal Reserve raises interest rates too far, too fast. The Fed is fully aware of this danger, and has clearly signaled that it intends to look quite carefully at the evolution of the economy before raising interest rates further. But when President Trump openly criticizes the Fed, he inevitably reduced its perceived independence. If the Fed does not increase rates further, it creates a possibility--which clear-minded and hard-eyed financial markets will take into account--that the Fed is bowing to political pressure. Thus, if the Fed feels a need to assert its independence from President Trump's criticisms, it might feel a need to raise interest rates, rather than be perceived as under political control.
2) President Trump has emphasized the importance of deregulation. However, there is a strong case to be made that when it comes to financial regulation, additional steps need to be taken. The Dodd-Frank legislation back in 2010 was heavily focused on banks: having banks hold more capital, having regulators do stress-test scenarios of bank balance sheets, limiting certain risks banks could take, and so on. But banks are a diminishing part of the overall financial system. The so-called "shadow banking" sector is a broad category describing all the ways that borrowers can raise money outside of the banking sector, and investors can then purchase these loans. As a simple example, a money market mutual fund receives money from investors, who can be thought of as "depositors," and then invest the money in bonds, which can be thought of as lending the money to whatever government or private entity issued the bonds. But it isn't a bank.
I've written about the potential risks from "leveraged loans" and corporate debt more broadly. As another example, the new financial rules require many financial derivatives to be traded through a "central clearinghouse"--a company lilke the National Securities Clearing Corporation or the Options Clearing Corporation--but whether these clearinghouses will remain solvent in a financial emergency, and how they should be regulated, is not as clear as it should be. Some countries have the ability to impose rules that might impose, say, loan-to-income ratios if it seems that borrowing is getting out of hand. If that seems like a good idea for the US economy at some point, no US financial agency has that power. In short, whatever the broad merits of reducing the regulatory burden on the US economy, some parts of the financial sector could use a close and proactive look from regulators.
3) President "I am a tariff man" Trump has expressed strong concerns that interactions with the rest of the world are hurting the US economy. I disagree, but set aside the cosmic arguments over free trade and just think about the adjustment issues for a moment. A major pattern in the US and world economy in recent decades has been a shift to "global supply chains." This isn't just a matter of goods, but also international movements of data, services, and e-commerce more generally. A modern supply chain isn't a simple thing: it involves negotiations between sellers and buyers over technical specifications, delivery of output, as well as accounting, legal, and managerial issues. It isn't yet clear to me whether President Trump intends to settle his trade disputes by negotiating small changes and then declaring victory--which is the pattern with the proposed shift from the North American Free Trade Agreement (NAFTA) to a US-Mexico-Canada Trade Agreement (USMCA)--or if he truly intends to deliver a good swift kick to the global trading system as a whole. Even if the Trumpist argument that the US should become less involved in international trade is correct in the long run, a tectonic disruption of global supply chains built up over several decades will impose large and immediate costs on many US firms and their workers, as well as on US consumers.
Just to be clear, listing these kinds of risks should not be taken as a prediction that they are actually about to happen. The most likely prediction for 2019 is that it will be a lot like 2018, or perhaps a bit slower, unless something dramatic happens.
If a Trump presidency turns out badly in various ways, then Trump skeptics like me will certainly say so. But if matters don't go wrong, then in fairness, then it seems to me that Trump skeptics should take a pledge to admit and acknowledge in a few years that at least some of our doubts and suspicions were incorrect--and indeed, we should be pleased that we were wrong. Here's my version of that pledge on a few economic issues.Well, President Trump has been in office two years. What's the economic record? The US economy in 2018 continued the economic upswing that started in June 2009, and by mid-2019, it will become the longest period without a recession in US economic history. However, The unemployment rate has been 4% or below for the last 10 months, and 5% or below for the last 37 months since December 2015. Inflation has stayed low. Despite its drop since late September, stock market values (like the S&P 500 index) are still up by abut 15% since January 20, 2017.
- If the US economy experiences a resurgence of manufacturing jobs, I will say so.
- If US economic growth surges to a 4% annual rate, I'll say so.
- If the US economy does not actually retreat from foreign trade during four years of Trump presidency (which may well happen, given that globalization is driven by underlying economic forces, not just trade agreements), I will say so.
- If US carbon emissions fall during a Trump presidency (which may happen with the resurgence of cleaner-burning natural gas and the larger installed base of noncarbon energy sources), I will say so.
- If the budget deficit does not explode in size during a Trump administration, despite all the promises for tax cuts and a huge boost in infrastructure spending, I will say so.
- If the Federal Reserve has maintained its traditional independence after 3-4 years, I will say so.
- If the number of Americans without health insurance is about the same in 3-4 years, or even lower, I will say so.
In short, it seems clear that the more dire predictions made back in 2017 about how the economy would immediately tank were based more in animus to Trump than in prescient analysis. Indeed, a lot of the economic patterns like growth and unemployment for the first two year of the Trump presidency look a lot like a continuation of patterns from the last few years of the Obama presidency. What about the specific questions I asked back in January 2017?
On the issue of manufacturing jobs, total US manufacturing jobs bottomed out at 11.4 million in January 2010, had risen to 12.3 million by January 2017, and were up to 12.9 million by the end of 2018. A pattern set in the Obama administration has continued along with the continued growth of the US economy. .
On the rate of economic growth, the pattern looks much the same as it did in Obama's second term. Trump has had one quarter of growth at a rate faster than 4% (2018, Q2), but there is no particular sign of a jump in growth rates or productivity.
On trade issues, Trump just talked about protectionism in 2017, but actually started implementing it in 2018. However, one of the ironies here is that with the threat of greater protectionism about to kick in, it appears that a number of companies have accelerated their trade plans, boosting their imports ahead of future tariffs. Thus, the US trade deficit will probably grow in 2018 compared to 2017. I'm not someone who thinks the bilateral US trade deficit with China should much of a focus, but for those who do, 2018 will mark the biggest such deficit ever. Thus, by one of President Trump's preferred measures, the size of the trade deficit, his policies are not a success in 2018. For those of us who worry about a disruption of global trade patterns, the bigger worries are coming in 2019.
On carbon emissions, US carbon emissions have been falling, not rising, while much of the rest of the world has been headed in the other direction. The lesson I would draw here is that too many people put too much faith in signing international agreements as the path to reducing carbon emissions. Focusing on government and industry actions, and how they shape prices, is considerably more important. For the US, I'd trade all the signatures on international climate change agreements for an actual carbon tax.
The ratio of federal debt held by the public to GDP doubled from 36% back in 2008 to about 72% by early 2013, This debt/GDP ratio edged up only a little more to 75% of GDP when Trump took office in early 2017, and had reached 76% by late 2018. But the Historical Tables released from Trump's Office of Management and Budget a year ago estimated that the budget deficit would rise from 3.5% of GDP in 2017 to 4.2% of GDP in 2018 and 4.7% of GDP in 2019 (Table 1.3). The real concern here is that in the middle run, starting about a decade from now, US spending is likely to rise substantially with the aging of the US population, and rather than address or postpone that issue, the $100 billion or so per year in tax cuts in the 2017 Tax Cuts and Jobs Act will make that middle-run debt crisis come a little sooner and be harder to address.
On the issue of the Federal Reserve, it seems fair to say that it has maintained its independence, but also to say that President Trump has challenged its independence in a way that hasn't been seen in the US since President Nixon pressured then-Fed chair Arthur Burns in the lead-up to the 1972 election--and Nixon's pressure was exerted mostly behind the scenes. The Fed has been systematically raising interest rates since December 2015, and if economic growth continues through 2019, I'd expect at least one more increase in 2019, too.
The number of Americans without health insurance hasn't budged much since President Trump took office.
Looking ahead at 2019 and 2020, it seems to me that the US economy faces several meaningful sources of near-term risk. Any of these would have a certain irony for the Trump presidency, because they would result in part from issues that President Trump has played a role in creating.
1) A recession could occur if the Federal Reserve raises interest rates too far, too fast. The Fed is fully aware of this danger, and has clearly signaled that it intends to look quite carefully at the evolution of the economy before raising interest rates further. But when President Trump openly criticizes the Fed, he inevitably reduced its perceived independence. If the Fed does not increase rates further, it creates a possibility--which clear-minded and hard-eyed financial markets will take into account--that the Fed is bowing to political pressure. Thus, if the Fed feels a need to assert its independence from President Trump's criticisms, it might feel a need to raise interest rates, rather than be perceived as under political control.
2) President Trump has emphasized the importance of deregulation. However, there is a strong case to be made that when it comes to financial regulation, additional steps need to be taken. The Dodd-Frank legislation back in 2010 was heavily focused on banks: having banks hold more capital, having regulators do stress-test scenarios of bank balance sheets, limiting certain risks banks could take, and so on. But banks are a diminishing part of the overall financial system. The so-called "shadow banking" sector is a broad category describing all the ways that borrowers can raise money outside of the banking sector, and investors can then purchase these loans. As a simple example, a money market mutual fund receives money from investors, who can be thought of as "depositors," and then invest the money in bonds, which can be thought of as lending the money to whatever government or private entity issued the bonds. But it isn't a bank.
I've written about the potential risks from "leveraged loans" and corporate debt more broadly. As another example, the new financial rules require many financial derivatives to be traded through a "central clearinghouse"--a company lilke the National Securities Clearing Corporation or the Options Clearing Corporation--but whether these clearinghouses will remain solvent in a financial emergency, and how they should be regulated, is not as clear as it should be. Some countries have the ability to impose rules that might impose, say, loan-to-income ratios if it seems that borrowing is getting out of hand. If that seems like a good idea for the US economy at some point, no US financial agency has that power. In short, whatever the broad merits of reducing the regulatory burden on the US economy, some parts of the financial sector could use a close and proactive look from regulators.
3) President "I am a tariff man" Trump has expressed strong concerns that interactions with the rest of the world are hurting the US economy. I disagree, but set aside the cosmic arguments over free trade and just think about the adjustment issues for a moment. A major pattern in the US and world economy in recent decades has been a shift to "global supply chains." This isn't just a matter of goods, but also international movements of data, services, and e-commerce more generally. A modern supply chain isn't a simple thing: it involves negotiations between sellers and buyers over technical specifications, delivery of output, as well as accounting, legal, and managerial issues. It isn't yet clear to me whether President Trump intends to settle his trade disputes by negotiating small changes and then declaring victory--which is the pattern with the proposed shift from the North American Free Trade Agreement (NAFTA) to a US-Mexico-Canada Trade Agreement (USMCA)--or if he truly intends to deliver a good swift kick to the global trading system as a whole. Even if the Trumpist argument that the US should become less involved in international trade is correct in the long run, a tectonic disruption of global supply chains built up over several decades will impose large and immediate costs on many US firms and their workers, as well as on US consumers.
Just to be clear, listing these kinds of risks should not be taken as a prediction that they are actually about to happen. The most likely prediction for 2019 is that it will be a lot like 2018, or perhaps a bit slower, unless something dramatic happens.
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