Can Trump turn the economy around?
WASHINGTON, August 8, 2016 — In his remarks to the Detroit Economic Club yesterday, Republican nominee Donald Trump promised that his economic program will turn the U.S. economy around. He said he will be focused on just three goals: jobs, growth and opportunity. “I want to jumpstart America,” he said. “It can be done and it won’t even be that hard.”
Trump’s assertion begs an important question: Can any president turn the economy around?
Between 1947 and 2006, the U.S. economy grew at an average annual rate of 3.4 percent. Since 2006, the U.S. has not had a single year of growth above 3 percent. Over the last four years, growth has struggled at 2 percent, and so far this year, it has scarcely risen above 1 percent.
Trump denounced current economic growth as the weakest since the Great Depression and put the blame squarely on President Obama, whom he called “incompetent.” He extended that incompetence to Hillary Clinton, who he said would continue down Obama’s economic path.
Trump buttressed his critique of GDP growth with remarks about employment numbers. Depending on how you count them, between 10 and 15 million new private-sector jobs have been added to the economy during the Obama administration; closer to 10 million net if you start counting in January, 2009; over 14 million if you start in February 2010. The Obama team argues that the count should start in 2010, when the Obama economic policies supposedly kicked in.
Trump argued in Detroit that even these job numbers are poor. He pointed out that work force participation remains near historic lows, with 93.4 million people outside the labor force. Official unemployment statistics conceal the millions of Americans who have simply given up looking for work. According to Trump, Obama’s policies have “created a silent nation of jobless Americans.”
Trump might have added that many of the jobs claimed by Obama are part-time and that the number of full-time workers at the end of 2015 was 121.5 million, only 400,000 more than in 2007. Over that same period, the U.S. population grew by about 20 million, from 301 million in 2007 to 321 million at the end of the 2015.
That’s one new job for every 50 new Americans.
Economic growth has slowed for a variety of reasons, and they change depending on whom you ask. Conservatives claim that heavy taxes and even heavier regulation are the main culprits; reduce the burden and the economy will boom.
Liberals quickly retort that conservatives want to eliminate the EPA, OSHA and other agencies that protect consumer and environmental health and safety. But in 2015 alone, over 3,000 regulations were added to the federal total, and they filled over 80,000 pages. The Code of Federal Regulations (CFR) now contains over one million specific regulations; the list alone, excluding the text of the regulations, is approaching 200,000 pages.
Trump observed correctly that the estimated cost of regulation to business is now $1.8 trillion per year, or half the federal budget. It’s certainly true that we could eliminate tens or hundreds of thousands of regulations without threatening anything more endangered than the bureaucrats who enforce them, and by eliminating them we could boost the economy by hundreds of billions of dollars. But which regulations should go?
Cutting tax rates could also boost the economy. Trump was again correct when he said that the U.S. has the highest corporate income tax rate in the OECD—the industrialized world. He proposed to cut the top rate from 35 percent to 15 percent, arguing that corporations that fled the U.S. would return, and some foreign corporations might make America their home as well.
Trump suggested cutting a variety of other taxes: personal income tax, capital gains and inheritance taxes in particular. And yes, in principle all of those could provide a kick to the economy.
Leave aside the social justification for these taxes and the political resistance to cutting them. Assume, contrary to fact, that the sole reason to levy taxes is to finance government expenditure. Would the cuts Trump proposes boost the economy while allowing government to operate at current levels?
Emphatically not. If Trump proposed cutting tax rates but expanding the tax base, we might continue to raise current levels of revenue, but Trump’s program narrows the tax base rather than expanding it. He’s talked about exempting the first $25,000 of income for people filing singly and $50,000 for people filing jointly, and of cutting income tax rates. He talked in Detroit about exempting child-care costs, a proposal raised by his daughter Ivanka at the Republican convention.
Trump’s tax cuts would add at least $10 trillion to the deficit over the next 10 years, even under dynamic scoring, which includes the impact of economic growth due to lower tax rates. In order to move the budget toward balance, the federal budget would have to be cut by at last $1 trillion per year.
The Committee for a Responsible Federal Budget estimates that Trump’s proposals would be revenue-neutral only if the economy grew by at least 10 percent per year (unheard of levels in our country in the last 60 years) or the budget were cut by 40 to 80 percent. Those cuts would have to include entitlements and the military.
But would the Trump program return the economy to healthy growth? Could it?
The answer to both those questions is, “probably not.” The deficits it would generate would make the national debt even more monstrous than it is, even if it returned growth to 3-4 percent, without the political will to take an ax to the federal budget. Neither Congress nor Trump has shown any inclination to do that, and Trump has rejected cutting Social Security or Medicare.
In fact, it is a myth that the president can operate the economy like a machine. No president, not Obama, Bush or potentially Trump can pull the correct levers to make the economy hum along like a Rolls Royce. The best they can do is get out of the way, and the worst is to throw grit in the engine.
And that’s a bad analogy, because the economy is more like a living organism than a machine. The president is a physician who can treat symptoms and suggest guidelines to healthy living but who has no idea how to optimize a living system.
Hillary Clinton’s program suggests that she buys into another bad analogy, the economy as pie. From her perspective, the days of high growth are gone due to resource constraints, an aging population and the sins born of our desire to consume. Under her program, the government’s job is to reallocate slices of a shrinking pie so that it can be shared more equitably.
Neither Trump nor Clinton proposes to shrink government. Clinton wants it to start providing more “infrastructure,” and Trump has called for doubling Clinton’s proposed infrastructure spending. As government starts making infrastructure wagers, expect to see more high-speed trains between cities like Los Angeles and Bakersfield, more bridges to uninhabited islands and more technologies deployed just as they become obsolete.
Clinton and Trump are both witch doctors who believe that they have more power to bend the economy to their wills than they do. Trump at least has the better understanding of what is inhibiting economic growth, but both are firmly in the grip of voodoo economic thinking.