By Michael J. Boskin
STANFORD – US President Donald Trump claims credit for “the greatest ever” economy, and constantly contrasts economic conditions today with the historically weak recovery under President Barack Obama. With growth this year over 3%, unemployment at 3.7%, and more job openings than unemployed people, the economy has greatly improved on Trump’s watch. The macroeconomic indicators are the best in decades.
Meanwhile, Obama, too, claims credit for the strong economy, arguing that his policies prevented a far worse downturn following the 2008 financial crisis. Neither Trump’s hyperbole nor Obama’s selective memory comes as a surprise. American presidents, like star athletes in team sports, get both too much credit and too much blame from voters and historians for what happens on their watch. Most presidential policies must be enacted by Congress, which often alters or blocks them. And many other factors are constantly at work, not least the US Federal Reserve’s monetary policy. So far, the Fed’s policies under its new chairman, Jerome Powell, have been spot on; but that hasn’t stopped Trump from publicly complaining that interest rates are rising too rapidly. While unusual, Trump’s griping pales in comparison to President Jimmy Carter’s nationally televised admonition to the Fed to lower interest rates in the midst of the raging inflation of the late 1970s.
Of equal importance are economic and political events in the rest of the world, technological and demographic forces at home and abroad, and the policies of previous administrations, which can expand or constrain a sitting president’s options. For example, President Ronald Reagan inherited double-digit inflation from Carter. President George H.W. Bush inherited a Latin American debt crisis and a savings-and-loan disaster that had been brewing for more than a decade. To their credit, Reagan and Bush both saw the problems before them and supported successful responses, despite the predictable political costs of the downturn that followed each episode.
For his part, President Bill Clinton inherited low inflation and a revived financial system. After the Republicans captured both houses of Congress in the 1994 midterm election, Clinton worked with them to balance the budget and reform welfare. Then came President George W. Bush, who inherited a legacy of insufficient national-defense spending. Early in his presidency, the attacks of September 11, 2001, laid bare the need to rebuild the military and improve homeland security. Finally, Obama inherited the financial crisis and the subsequent Great Recession. But he then presided over the weakest economic recovery since World War II, owing partly to his attempts to reengineer vast swaths of the economy.
These American examples are tame compared to others in recent history. In Central and Eastern Europe, post-Cold War reformers had to manage the transition from a decrepit centrally planned socialist system to a free-market economy. Whoever eventually succeeds President Nicolás Maduro in Venezuela will inherit the unmitigated economic and social disaster that is Chavism.
Returning to 2018, the Trump administration’s rollback of Obama-era regulations and enactment of corporate-tax reform have both helped to promote growth. Trump’s trade policy, however, is risky. If it proves successful in opening up China’s market and curtailing technology transfers from US companies, then it will have been constructive. But if it precipitates a long-term trade war, it could do serious damage.
Trump often takes presidential exaggeration to new heights with his common refrain that, “Nobody’s ever seen anything like this.” But this is not to say that past presidents have eschewed such hyperbole. For example, after repeatedly invoking “shovel-ready” projects to pass his February 2009 stimulus bill, Obama later admitted “…there’s no such thing as a shovel-ready project.” And his pledge that Obamacare guaranteed that patients could keep their health plan and doctor received “four Pinocchios” , the worst possible rating, from the Washington Post fact checker.
Obama has also claimed that nobody knew how bad the Great Recession was going to be.
And yet, immediately after his election, I pointed out that, “This recession is the real thing, far worse than the two brief, mild recessions of the last quarter-century.” Later, Obama expressed regrets that he had not communicated earlier just how bad the recession would be and that if he had, perhaps he could have made the stimulus bill much larger. But if nobody knew how bad it was going to be, how could it have been communicated earlier?
Obama seems to have conveniently forgotten that his first term budgets repeatedly estimated growth above 4% for the next several years. That is double what was actually achieved. Clearly, his advisers either didn’t have an accurate read on the economy, or they were wildly optimistic about the efficacy of his policies. Since then, they have fallen back on a discredited theory of “secular stagnation” to explain the tepid recovery.
As a result, when Trump came to office, he inherited a national debt that had doubled on Obama’s watch, rapidly rising interest rates, and unfunded Social Security and Medicare costs. Under these conditions, Trump’s biggest and boldest policy proposals will likely run into budgetary constraints. He has already ruled out any changes to Social Security. His and congressional Republicans’ attempts to replace the Affordable Care Act (Obamacare), and to curtail the growth in Medicaid spending, have been unsuccessful. And a temporary increase in defense spending will revert back to insufficient levels after this fiscal year.
Although the tax package that Trump signed into law last December front-loaded tax cuts and is now helping the economy to grow, government revenue has yet to respond much to that growth. Unfortunately, growing deficits mean it will be hard to make the legislation’s personal tax cuts permanent any time soon.
In the event of a downturn, voters will be quicker to blame Trump than they have been in giving him credit for today’s boom. Given all of the president’s efforts to attach his name to the current economy, it will not be easy for him to shift the blame to the Fed, Democrats, or anyone else.
Michael J. Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H.W. Bush’s Council of Economic Advisers from 1989 to 1993.
Copyright: Project Syndicate, 2018.
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