Donald Trump keeps promising he is the one to make the economy strong again. His campaign for reelection will without doubt be focused on his boast that he alone can “rebuild” the economy. His claims cannot go unanswered. His assertion that the economy has never been stronger is not true.
The point that needs to be made now is that the Trump economy has had deep weaknesses, that policies as usual under Trump will fail as we face full-fledged depression, and that he seriously misunderstands the link between opening up businesses and economic expansion, as apparently have his economic advisers. Democrats now have the opportunity to declare that they are the ones who know how to build the economy.
No sharp recovery is likely unless a trusted coronavirus vaccine is developed and disseminated. Individuals are simply unlikely to rush to stores and restaurants. They will hesitate to go back to work without proof that the likelihood of infection is very low. Having learned to work at home, workers and business may encourage it. If cities reorganize how they function, real estate markets may collapse. Meantime, reduced investment by business may well weaken industries for many years. A recovery from a steep recession—or, as is likely, what we will call a depression looking back—will therefore need much more federal support.
As the nation looks down the long road toward recovery, it is important to make clear, as we state, that Donald Trump did not remotely preside over the best economy ever. His principal economic policy—tax cuts aimed at wealthier Americans—simply did not work as promised. The economy grew as fast as Trump’s best showing—the rate of growth of national income—in several quarters in the Obama years, and it grew faster for longer periods of time in the post-World War II economy, particularly the late 1960s and the late 1990s. In those years, growth approached 4 percent a year. GDP growth after the first calendar quarter of 2019, however, hovered around an anemic annual rate of 2 percent. Under Trump, there was only one moderately strong year of growth, in 2018, and that barely surpassed 3 percent. Thus, returning to greatness is not only unlikely under the same policies; Trump never achieved it.
In fact, the Trump economy has been weak in two highly important areas. Productivity, or output per hour of work, has grown slowly. This is the key to raising the standard of living. From 2017 to the present, the four-quarter moving average of annual labor productivity growth has only cracked the 2 percent mark twice. Despite tax cuts, there is no substantial difference with labor productivity growth under President Trump and President Obama’s second term. Recently, the rate of productivity fell 2.3 percent, reflecting the new recession.
Trump has also promised that tax cuts would stimulate capital spending. But capital investment has remained substandard as a percentage of the nation’s income—formally, Gross Domestic Product (GDP). Capital investment is what makes economies grow. Capital expenditures have not recovered to pre-Great Recession levels of about 30 percent of GDP, seen from 2003 to 2006. Indeed, expenditures have been consistently lower than any other period of recovery since 1951, not yet reaching 28 percent of GDP.
Trump’s tax cuts were the source of his exaggerated claim that he built the economic recovery. His economists promised upwards of 4 percent annual growth—and, as noted, didn’t come close. Meantime, they promised average annual income growth of $4,000 a year per worker. We got about $550 in 2018, the year Trump’s tax cuts were supposed to lead to a surge.
The one bright spot of the economy has been an unemployment rate of around 4 percent. But this is less impressive given the performance of wages: worker income as a proportion of corporate income is very low. Overall, annual nominal wages are not growing as fast as they did in past periods of expansion—annual growth is hovering around 3.5 percent in the last year, in contrast to 5 percent annual growth recorded in the late 1990s—and, especially, wages of those in the middle class have lagged.
The stock market is the other bragging point of the president. But it reflects the strength of relatively few giant companies, not the economy overall. The recent S&P 500 rally has been driven by a select number of tech companies benefitting from some of the economic changes brought on by stay-at-home orders. Aggressive action from the Federal Reserve has also supported financial markets in a time of weakening economic growth. With so few Americans owning stock market wealth, this expansion means little to average Americans.
Trump’s Policy Failure
In a time of economic suffering, when it’s likely that the unemployment rate will rise above 25 percent, let’s consider what Trump is not doing. In contrast to his promises, he has not come up with a proposal to invest in infrastructure—a key policy to support future economic growth and better wages, particularly for his so-called favorite of manufacturing. His plans have actually involved cuts to infrastructure spending in the long run. Net public investment still sits well below 1 percent of GDP, suggesting there is strong need for increased public expenditures that support infrastructure investment.
Trump’s vindictive tariffs have not worked to raise American incomes. Almost all economic analysts calculate that American consumers, not China, have paid for tariffs on Chinese goods. A JP Morgan report from 2019 forecasted that the tariffs would cost American families $1,000 per year, while a NBER working paper written by economists at the New York Federal Reserve found that almost 100 percent of import taxes were borne by U.S. consumers. And, the phase 1 deal with China Trump struck to end the trade war meant that he surrendered the supposed aims of the trade war.
Trump has no plans for significant investment in education. His latest budget proposed deep cuts to federal aid programs, such as Stafford loans and Pell Grants for higher education, and he has made no serious proposals to expand spending for the public school system.
Trump has proposed policies that will reduce the effectiveness of anti-poverty programs. For example, the administration is proposing further work requirements on food stamps, which will reduce program participation even by the working poor. His administration has also finalized a “public charge” rule that could lead to reduced program participation in Medicaid, SNAP, and housing assistance among eligible immigrants applying for green cards. Immigrants fear that their application for permanent status will be rejected on the basis of receiving public assistance.
The Trump administration is also trying to reduce the official poverty rate. It is proposing new ways to measure poverty, which is highly controversial and opposed by many analysts. A lower poverty rate would mean reduced benefits, which are linked to poverty, such as Medicaid, Head Start, and the Children’s Health Insurance Program.
He has offered no proposals to provide child care or family leave programs. According to the Economic Policy Institute, child care costs range from $450 to more than $1,200 a month on average, depending on the state of residence. The United States remains one of only eleven countries in the world that does not guarantee paid family leave to all workers, and it is the only OECD country not to guarantee paid family leave.
Similarly, he has ignored worker needs for guaranteed sick leave. The sick leave policy that passed as part of the first round of COVID-19-related stimulus only covers about 20 percent of the workforce because of loopholes related to firm sizes.
Trump wants to reduce access or even eliminate Obamacare, with nothing serious to replace it, at a time when more than 9 million workers have lost their employer-provided health insurance. Many millions more stand to lose their health coverage in the midst of the pandemic. The federal government also has a role to play in preventing the kinds of cuts to Medicaid being advocated by state governments, but Trump has not acted on this.
Trump has refused to address the climate crisis, electing to deny its existence while deregulating the fossil fuel industry. Instead of propping up the price of oil by coordinating with OPEC countries, the United States should be investing in green jobs and infrastructure to move beyond fossil fuels. Bringing fossil fuel industries under public control and using their resources to kickstart a green transition away from carbon-emitting energy would be a decisive action against climate change in a time when crude is trading at less than $15 a barrel.
What is needed now is significant financial stimulus in terms of wage guarantees, a federal jobs program, stimulus checks, a robust unemployment insurance program, serious government investment, and aid to states whose investments in education, health care, and other essential services are in jeopardy. Growing demand from business and workers is the key to economic growth, not tax cuts. Higher wages should be the foundation of a strong recovery in coming years, not Trump’s rallying cry around the stock market, so important to his friends and contributors.
The Democratic House has produced an opening bid of $3 trillion that is fairly good but not ideal from the point of view of the analysis above. It is a substantial improvement over the ideas proposed by the White House, which amount to “wait and see” inaction.
In April, a survey of economists predicted a sharp jump in unemployment followed by a gradual decrease to 6 percent at best in 2021. By the release of this April’s jobs report, the prediction of a quick recovery has received little support, with some experts instead predicting that an 8–10 percent unemployment rate by 2021 would be the best we can expect. Meantime, the unemployment rate could rise to 30 percent, and capital investment is likely to be weak. In addition, the unemployment insurance system is inefficient, leading to delays in the payment of benefits. This means tens of millions of people will be unemployed without income to pay rent, medical bills, and bills for other necessary goods and services.
Major Policies That Can Help
There are nine programs that have been wi dely discussed to support workers and citizens adequately.
- Ample state aid, to support education and teachers, social policies such as child care, and key services from firemen to policie, to libraries.
- A federal jobs creation program. Such programs have been proposed by economists as a response to COVID-19 and the subsequent recession.
- A wage guarantee program that enables workers to stay attached to their job and health insurance, as proposed by Representative Pramila Jayapal.
- Expanded and reformed unemployment insurance system. The Worker Relief and Security Act proposes such expansion and reform.
- Direct stimulus payments to all citizens. Senators Kamala Harris, Bernie Sanders, and Ed Markey have proposed $2,000 a month for the duration of the crisis, plus three additional months of relief.
- Rent and mortgage cancellation during the pandemic, as proposed by Representative Ilhan Omar.
- A buyer-of-last-resort program. Proposed by economists Emmanual Saez and Gabriel Zucman, such a program would have the federal government compensate businesses for all lost sales and business losses, so that businesses can retain employees. Their proposal would effectively keep cash flowing while the economy is put on hold.
- A substantial increase in food stamps.
- A one-year and hopefully permanent increase in the Child Tax Credit (CTC) that is refundable to protect poor and low-income children.
In this space, we won’t analyze each of these. Note that the new Democratic proposal, The HEROES Act, does not include a program for jobs or wage guarantees, which have been successful in Europe. The act does include more direct stimulus, ample state aid, a one-year extension of the CTC, an increase in food stamps benefits, and an improved unemployment system.
Congress should also consider this moment an opportunity to correct and invest in any neglected areas that will provide a true foundation for economic growth, including health, child care, education, and infrastructure. The Century Foundation has developed a list of suggestions to meet such needs.
But at bottom, Congress must rebuild the economy because the president won’t—indeed, doesn’t know how. Tax cuts have failed us time and again since Ronald Reagan. Neglecting the stagnation of incomes for all is surrender. Spurning government is the way to defeat. There is a large gap to fill in American leadership—an immense one. The opposition should be strong enough in its convictions to lead the way.
This research is supported by the Bernard L. Schwartz Rediscovering Government Initiative.
header photo: U.S. President Donald Trump listens during a roundtable in the State Dining Room of the White House in Washington, DC. Source: Doug Mills – Pool/Getty Images