A reality check for Trump's likely claims of economic success during State of the Union
During his State of the Union address Tuesday night, President Donald Trump is likely to tout a strong economy and labor market as perhaps his greatest successes halfway into a four-year term tainted by a recently-resolved government shutdown and a probe into his administration’s ties to Russia.
Yet while Trump’s tax cuts and spending increases juiced growth in the short term, many economists say the benefits won’t last and will swell the deficit over the longer run, making it tougher to respond to the next recession.
Trump’s cuts to taxes and regulations also pumped up stocks, and consumer and business confidence, to the highest levels in recent memory. But his trade battles with countries such as China, Canada and Mexico have dented U.S. exports, business sentiment and stocks – all for an uncertain payoff.
Wells Fargo economist Mark Vitner believes the net result has been positive. “The economic recovery has spread to more parts of the country,” such as the Midwest and South, he said. "Manufacturers and small businesses know Trump has their back."
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Gregory Daco of Oxford economics disagrees. “His policies, including the tax cuts, increased government spending and deregulation, boosted growth in the short run, but the lingering long-term effects from policy uncertainty, trade tensions and stricter immigration will continue to weigh on growth,” Daco says.
Here’s a rundown of Trump’s economic policies and their effects:
Trump’s signature achievement, the $1.5 trillion tax cut, is likely to boost economic growth by four-tenths of a percentage point for 2018 and one-tenth this year, largely by spurring more consumer and business spending, according to Oxford Economics.
As a result, economists estimate the nation’s gross domestic product grew 3 percent last year, the most since 2005 and a fulfillment of Trump’s vow to generate 3 percent or better growth.This late into the cycle, the economy normally would be losing some steam.
Yet Trump and the Republican Congress notched the faster gains by taking the highly unusual step of enacting a stimulus during a healthy economy, when the government typically uses higher revenue to narrow the deficit or run surpluses.
The White House said the tax cut would pay for itself with increased economic activity, but that hasn’t been the case. Economists estimate the tax reform will cost the government $1 trillion over the next decade after figuring in the faster growth. The wider deficit will make it tougher for Congress to pass another stimulus to address the next recession, says Maya MacGuineas, president of the Center for a Responsible Federal Budget.
Trump also promised the legislation would jolt business investment by allowing firms to depreciate capital spending more rapidly. But while investment picked up early last year, it quickly faded in the second half. As a result, the tax law hasn’t altered the economy’s growth picture long-term by boosting worker output with new technologies, Daco says.
The story is similar for the Bipartisan Budget Act of 2018, which increased federal spending by about $300 billion over two years, largely for defense. That’s lifting economic growth by three tenths of a percentage point in 2018 and four-tenths in 2019, Oxford says.
But the expiration of the measure would be a drag on growth in fiscal 2020 unless the higher spending levels are extended, as Daco and many other economists expect. That, however, would add more than $1.5 trillion to cumulative deficits over the next 10 years.
Trump is all but certain to herald a dynamic labor market. Employers added an average 223,000 jobs a month last year, much more than the 170,000 expected.
Daco notes Trump inherited a healthy economy and job growth from the Obama administration. In President Barack Obama’s last two years in office, the economy added 5 million jobs, compared with 4.8 million in the first two years of the Trump White House.
Yet Trump’s total is impressive considering the 4 percent unemployment rate means far fewer available workers. Again, though, Trump achieved the economic and payroll growth through a stimulus that’s helping balloon the deficit.
Vitner, however, gives Trump more credit for the employment gains. For example, he says, the lower taxes encouraged Americans to work longer and some retirees to return to the labor force.
The White House says Trump has cut more than 1,500 regulations, though analysts say that total is inflated. Still, he has squashed rules designed to curb greenhouse gas emissions from power plants, and has rolled back regulations that critics say ensure that investors get unbiased advice and that protect workers, among others. The moves have cut cost for businesses and boosted their confidence, spurring more hiring and investment, Vitner says.
Any economic downside may not become evident for years or decades. In November, 13 federal agencies issued a report saying that if global warming continues at its current pace, the U.S. economy would be 10 percent smaller than otherwise by the end of the century.
Trump will undoubtedly tout his bare-knuckle trade tactics that resulted in a new – though still to be ratified – trade pact with Mexico and brought China to the negotiating table. Trump slapped tariffs on those and other countries, which responded with tit-for-tat duties.
Vitner says the new trade deal with Mexico and Canada encourages the purchase or goods within North America. But the Peterson Institute for International Economics calls the agreement an overall downgrade for North America, saying consumers may see higher car prices, and Ford and General Motors are already laying off workers.
Meanwhile, Trump’s tariffs on $250 billion Chinese imports, along with China’s countertariffs on US goods, have increased prices for American manufacturers and retailers, and hammered exports for Midwest farmers and other U.S. producers. A hike of the U.S. tariffs from 10 to 25 percent is on hold while U.S. and Chinese officials negotiate.
Vitner says the standoff will be a success if Trump can ultimately convince China to open its markets more widely and stop stealing U.S. intellectual property.
Daco, however, says he doesn’t foresee a significant shift in the balance of U.S.-China trade and the fight already has generated the most trade policy uncertainty in 25 years and isolated the U.S. in the global economic arena.
Trump was rocket fuel for the market during most of his first two years in office, as his policies of lower taxes and regulations helped push up the Standard & Poor’s 500 index by nearly 30 percent. But his trade tactics have fomented uncertainty that has helped lower stocks by nearly 8 percent since September.