The Trump administration has declared that economic performance over the three years, pre-COVID-19, was spectacular. Many have come to believe that they possess some kind of secret sauce that has energized economic growth and unemployment to levels rarely seen before. So, does the economic data support these claims?
Performance is relative: So, let’s compare the recent three years (2017-2019) to the prior three years (2014-2016). Each of these periods was preceded by a healthy and growing economy, which makes the comparison appropriate.
During the recent three years, the deficit increased by $2.4 trillion, which is substantially greater than the $1.5 trillion increase during the prior three years, amounting to a 60 percent increase. A reminder that the implicit pre-election promise was to run a surplus such that the national debt would be erased over a period of 10 years.
Economic growth was 7.6 percent during the recent three years compared to 7.1 percent during the prior three years, which is primarily due to the increase in the deficit. No secret sauce in the works here. In fact, the increase in real GDP is paltry compared to the increase in the deficit because the tax cuts were skewed towards the rich who have a low marginal propensity to consume and spent little of their tax cuts. Much of the tax cuts that went to corporations was used to buy-back stock, which buoyed the stock market.
There is a lack of empirical evidence that tax cuts turbocharge long-term economic growth such that they will eventually pay for themselves. Long-run economic growth is a function of net additions to the labor force and productivity increases. The former is slowing significantly while the latter is dependent upon technological innovation. Lower taxes can increase productivity marginally, however, increases in productivity resulting from automation can be a double-edged sword because companies would employ less labor.
Non-farm jobs grew by 6.6 million during the recent three years, which is significantly less than the 8.1 million jobs created during the prior three years. The narrative being disseminated would like us to believe otherwise, but the proof is in the pudding. All of this data was gleaned from publicly available government databases, the same databases that calculate the unemployment rate.
One of the tenets of research methodology is that correlation does not suggest causality. Demographics and not economic policy is the compelling reason why the unemployment rate has trended lower over the past six years — actually the past nine years — and had retreated to 3.5 percent by the end of 2019.
About 20 years ago demographers and analysts had forecasted that the United States would face a labor shortage right about now because of baby boomers who are causing a job boom by retiring, aging and requiring care and maintenance and here’s why: the “dependency ratio.” The ratio, which measures the number of dependents each worker must support started to rise around 2012 as waves of baby boomers began to retire.
Furthermore, the dependency of each retiree (over 65) is three times that of a child (under 20) because seniors consume three times more in goods and services than children. So, even though Americans are having fewer children, more resources will be required to support the growing population of retirees. About 10,000 boomers are turning 65 every day. As they retire and age, they are creating far more job openings than the ones they leave. The point is that even if Kanye West was in charge of the economy, the unemployment rate would have been at 3.5 percent at the end of 2019.
Tougher trade restrictions have been placed on our trading partners over the past two years, such as tariffs on goods imported from other countries. So, has the trade deficit trended lower? The data shows that the trade deficit increased from $2.1 trillion during the prior three years to $2.5 trillion during the recent three years.
Trade is a two-way street, as American farmers whose exports to China are down significantly, will attest. Federal Reserve economists have determined that the 2018 tariffs actually reduced manufacturing employment and increased producer prices. While the tariffs did reduce competition for some industries, this was more than offset by the effects of rising input costs and retaliatory tariffs. Although the longer-term effects of tariffs may differ from what they determined, the results indicate that the tariffs, thus far, have not led to increased activity in the U.S. manufacturing sector.
All in all, the data shows that while economic performance between 2017 and 2019 was adequate, it certainly was less than spectacular. In fact, many of the metrics show that economic performance was superior during the prior (Obama) three years. The point is that it is important to scrutinize the data that is published by reliable sources rather than listening to narratives that make grandiose claims.
Murad Antia teaches finance at the Muma College of Business, University of South Florida, Tampa. The views are his own and not necessarily those of USF.