From Project Syndicate
WASHINGTON, DC – US President Donald Trump and his Secretary of the Treasury, Steven Mnuchin, have promised an economic miracle. They argue that when the United States adopts their policies, it will consistently achieve annual economic growth above 3%, or even above 4%. After a year of being in charge, pushing hard on deregulation, and getting what it wanted in terms of tax cuts, how is the Trump team doing?
We are still in the early days, but the results so far have been disappointing. And the US’s medium-term prospects for sustained growth could be endangered if Trump pursues the policies he claims to want.
Trump has repeatedly argued that America’s overall economic performance in 2017 should be seen as the direct result of his policies, and he has made a big deal out of the third-quarter growth rate, which was initially reported as 3.3%, then revised down to 3.2%. Yet, in the fourth quarter, growth was down to 2.6%, and initial estimates suggest that overall growth for the year will not surpass 2.3%. That is lower than what was achieved under former President Barack Obama in 2014 (2.6%) and 2015 (2.9%).
In fact, under Obama, the quarterly growth rate surpassed 3% seven times, and even reached 4.6% on two occasions. From the third quarter of 2009, growth was positive in every quarter, save two. But not only was headline growth sturdy under Obama; his administration also presided over considerable job growth – the economy added more than two million jobs annually in seven out of his eight years in office – as well as falling unemployment and higher labor-force participation.
Far from a miracle, Trump has failed to deliver any kind of improvement to economic growth. To understand why, it helps to remember that Trump has not actually done much in office. Notwithstanding his constant bragging about deregulation, the total economic impact of his regulatory repeals has been trivial relative to the size of the economy.
Moreover, the tax cuts that Trump signed into law at the end of 2017 will have very little positive impact on growth. The tax package is primarily about redistribution from middle-income households – particularly those in high-tax, Democratic-leaning states such as New York and California – to the richest Americans.
People who own capital that is already in place – such as large buildings in New York – will do well. But the law does not offer much of an incentive to invest in new capital, either by launching a new company, developing new products, or investing in new plants and equipment. Furthermore, as I pointed out at a recent Intelligence Squared US debate in New York, the law may actually have a negative effect on research and development, which is a key driver of long-term growth in the US.
Looking at the 2017 data, there is no sign that business investment ticked upward under Trump. Yes, this is a volatile data series, because it rises and falls with the usual course of events. But it is also another area where Obama set the bar high during his two terms.
Read the full post at Project Syndicate
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management, where he is also head of the Global Economics and Management group and chair of the Sloan Fellows MBA Program Committee.