(Bloomberg) Before the coronavirus gouged holes in U.S. prosperity in March, the economy was sailing along nicely. There’s not much debate about that.
There is, however, plenty of disagreement about how much credit should go to the policies enacted during President Donald Trump’s term. Bloomberg Opinion columnists Ramesh Ponnuru and Karl W. Smith found themselves on different sides of that question and chatted about it via email.
Ramesh Ponnuru: Karl, you and I are members of a very small club, being a) economic conservatives who are b) relatively dovish on monetary policy under the terms of the debate over the last 10 years and c) Bloomberg Opinion columnists. Not surprisingly, then, I agreed with much in your recent column on how Trump’s economy performed better than Obama’s. The economy was strong during Trump’s first three years in office, and Democrats made themselves look foolish by denying it. I mostly agree with you, as well, on which Trump policies should be kept: namely, tax cuts and a Federal Reserve erring on the side of low interest rates.
But I don’t think any of Trump’s policies can bear quite the weight you put on them. Looking at trends in unemployment and gross domestic product growth, I don’t see either Trump’s election, his inauguration or the enactment of the 2017 tax cut as an inflection point. What I see is positive trends that just keep going. And as in the last prolonged U.S. boom before this one, in the 1990s, the later stages saw a tight labor market that translated into broad-based wage gains.
You suggest that Trump’s critics were wrong to doubt that he could produce 3% growth. But we got only one year of such growth (if you round up), not the “sustained” 3% growth the administration set as a goal. It seems to me, then, that the people who said it couldn’t be done, or at least wouldn’t, were … right.
Karl W. Smith: I am glad you agree that the trend in growth rates continued and that this pulled people back into the labor market. What I see is that in 2016, the trends had begun to slow down, as one might expect late in any cycle. The Fed expected no future improvement in unemployment. The Congressional Budget Office expected slowing economic growth. The San Francisco Fed predicted that the new ceiling on growth would be about 1.5%. Moreover, policy both at the Treasury and the Fed had been focused on deficit reduction and interest-rate normalization, meaning increases. Both of those are the conventional things to do if you thought you had reached full employment.
If you believed the consensus then, you would have thought that a deviation from these policies would have failed to raise employment and instead would have driven up inflation and, as a result, long-term interest rates. Trump did deviate from the policies — and got lower unemployment and higher labor-force participation. Inflation hovered below the Fed's 2% target and long-term interest rates were subdued. It seems clear that the predictions guiding conventional wisdom — and policy — were wrong.
I think the only dispute is whether Trump himself deserves credit for this. In some sense, that is a metaphysical question. I tried to sidestep it by addressing the column to President-elect Joe Biden and saying: “Look, these are results your administration would not have predicted. Further, if you return to the focus you had before — raising taxes, trying to increase jobs through training programs and ignoring monetary policy — you are likely to see worse results.” It’s hard to see how that's false.
RP: There’s another issue worth considering: When the performance of the economy diverges from projections for it, how much of the difference should be attributed to changes in policy, how much to other changes, and how much to flaws in the forecast? The Trump years were not the first time forecasters got it wrong, after all. The CBO thought real growth would be 1.4% in 2013; it came in at 1.8%. It would surely have been a mistake to conclude that the tax increases and spending restraint implemented during that period caused the economy to over-perform.
The inescapable errors of even the best forecasters are why it can be helpful to look at the actual performance of the economy at different times — as your column did. You noted that real median household income grew by a pathetic 0.4% from 1999 to 2016 and then rose 9.2% from 2016 to 2019. Comparing a long period to a short one can make for an arresting statistic but a potentially misleading one. If you look at just the period 2014 to 2016, you find faster improvement in that indicator than what was achieved under Trump. This also makes me skeptical that we can conclude that policy changes have had strongly positive effects. But then, as a conservative, perhaps I am biased toward underestimating the power of government policy!
KWS: Your point is well taken and I guess ultimately my argument is as much with the framework that produced those forecasts as with evaluations of policy. For example, household income had been trapped within a small range for decades. In 2014, it was near the low point of that range, so many economists thought it could and should rise naturally. By 2016, it had hit the high point, so economists became more pessimistic about further improvement.
There was a widespread sense that the modern economy had structural limitations that precluded breaking out of that narrow range. Our Bloomberg Opinion colleague Tyler Cowen wrote a book about this phenomenon called “The Great Stagnation.” Former Treasury Secretary Lawrence Summers liked the phrase “secular stagnation.” Their theories were deeper and more sophisticated than simple pronouncements about household income, but they — and others like them — implied that simply ramping up demand wouldn’t work.
Some theories, like the one proposed by the entrepreneur and Democratic presidential aspirant Andrew Yang, suggested that without radical economic restructuring, employment and household income would collapse. Yet the years 2018 and 2019 showed that the economy mainly suffered from a cyclical problem and that aggressive countercyclical policy was enough to break out of that trap.
I see this as weakening the case for government intervention. We don’t need industrial policy, free college or a universal basic income to lift the middle class. We just need to support the free market with adequate demand — preferably from the Fed, but I will take tax cuts or, as a last resort, even government spending — and entrepreneurs will find a way out of stagnation themselves. Trump’s economy, perhaps because of his ineptitude, demonstrated what private enterprise could achieve if given simple but sufficient support.