President Donald Trump’s first year in office appears, on a short-term view, to have been positive for the US economy. But it’s too early to say.
Trump supporters argue the US economy has improved thanks to the successful passage of his promised tax cuts and the reversal of financial regulations. They note that since Trump assumed the presidency, the stock market has appreciated by 25%, unemployment has declined to a decade-long low, and economic growth has risen to around 3%.
In proclaiming these gains as evidence of the president’s sound economic stewardship, Trump backers choose to ignore that the stock market rebounded by 35% in 2009, President Barack Obama’s first year in office. Over his eight years in the White House, the stock market roughly trebled. Nor do they acknowledge that job growth in Trump’s first year has been no faster than under Obama.
Similarly, Trump supporters ignore that European and Japanese stock markets performed as well as if not better than those in the US and downplay the dollar’s 10% fall over the past year. The impressive US stock market and economic performance in 2017 had more to do with major central banks’ loose monetary policies than the change of US administration.
A more troubling reason to question Trump’s economic stewardship is his unfunded tax cuts, his main economic policy initiative to date. According to the bipartisan Congressional budget office, over the next 10 years these cuts are likely to add around $1.5tn to public debt. It is estimated that those in the highest income brackets will enjoy the bulk of the gains from the cuts.
Unfunded tax cuts make little sense at this stage in the US economic cycle. The basic principles of public finance dictate that in good times, when the economy is strong and unemployment is low, policy-makers should make every effort to reduce the public deficit. This leaves room for increasing the budget deficit in bad times when the economy might need a fiscal boost. With unemployment down to 4% and the economy growing healthily, the US does not need a boost that will limit room for fiscal manoeuvrability.
The tax cuts could damage US economic performance in 2018 and contribute to a wider trade deficit by further complicating the Federal Reserve’s task of normalising interest rates. In the light of inflated global asset prices, the last thing the Fed needs is a fiscal boost that might force it to raise interest rates faster than it might have done to avoid inflation.
Another cloud hanging over longer-run is Trump’s adherence to his ‘America first’ trade policy and seeming disdain for international economic policy co-operation. The president withdrew the US from the Trans-Pacific Partnership and refused to sign up to the G20 pledge to avoid increased protectionist policies. He is threatening to pull the US out of the North Atlantic Free Trade Agreement and appears to be inviting a trade war with China.
This time could be different, and unsound economic policies may not spell trouble in the long term. However, all clues from previous episodes of economic mismanagement seem to point in the opposite direction.
Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department and the Chief Emerging Market Economic Strategist at Salomon Smith Barney.