We’ve now had over two and a half years of President Donald Trump’s economic policies. While that time is relatively short, it gives us some basis for judging those policies. I judge him in two ways: (1) as a believer in economic freedom and (2) as an economist who cares about people’s economic wellbeing. By those criteria, some of Trump’s policies have been very good indeed and some have been horrid. Specifically, the former have been the 2017 tax cut and his substantial deregulation and holding off on new regulations. The horrid policies have been those on trade, immigration, and federal government spending.
In this essay, I’ll discuss the very good indeed. Part Two, in a fortnight, will focus on the horrid.
These are the opening paragraphs of my article “Trump’s Economic Policies: An Assessment, Part 1,” Defining Ideas, October 17, 2019.
A large part of the piece is on the 2017 tax cut. The longer I’ve had to think about it, along with my own experience with it while doing my 2018 taxes, the more impressed I am by it. And I’m especially impressed by the cut in the corporate income tax rate.
Another excerpt:
One rough and ready way to estimate the net effect of all of Trump’s economic policies is to compare the growth of real GDP during his time in office with that of Obama.
Obama deserves no blame for the recession that he inherited when he entered office. That recession ended in the second quarter of 2009. Let’s stack the deck slightly in his favor by giving him credit for the growth from the second quarter of 2009 to the first quarter of 2017. I say “in his favor” because during recoveries from recessions, real GDP growth is typically high. From the second quarter of 2009 to the first quarter of 2017, real GDP grew by an annual average of 2.2%.
How about real GDP growth under Trump? He should get little to no credit for growth during the first quarter of 2017 because he was in office for only a little over 2 months of that quarter and his policies had little time to work. So let’s give him credit for real GDP growth between the first quarter of 2017 and second quarter of 2019, the latest quarter for which we have data. During that time, real GDP grew by an annual average of 2.7%, which was half a percentage point higher than the growth rate during Obama’s time in office.
That’s substantial. What makes that 0.5 extra percentage points of annual growth even more striking is that it happened years after the economic recovery occurred, and growth rates well after recoveries tend to fall.
So the good news is that the economic policy issues on which Trump has been “very good indeed” seem to have outweighed the policy issues on which he has been “horrid.”
Read the whole thing.
READER COMMENTS
P Burgos
Oct 18 2019 at 7:56pm
Shouldn’t Ryan and McConnell get the blame/credit for the tax cut? Perhaps Rubio and Lee for the expansion of the child tax credit?
David Henderson
Oct 18 2019 at 11:11pm
No, not the credit; some credit.
But without Trump’s signature, the tax cut would not have passed.
nobody.really
Oct 21 2019 at 3:20pm
This is the irony: Many of the things that policy wonks praise Trump for doing are things that ANY Republican president would have done. The policies that seem uniquely Trumpian are policies that make policy wonks gag.
Indeed, if a more conventional Republican were president (say, Pence), I expect we would have seen many more Republican policies adopted. Thus, judged from the perspective of a conventional Republican president, I expect many Republicans should be frustrated with Trump.
Trump’s only real contribution, therefore, is that he got elected. [Insert “assume a can opener” joke here.]
zeke5123
Oct 21 2019 at 5:44pm
Maybe, maybe not. A conventional Republican may have backed down. WHo knows?
Thaomas
Oct 19 2019 at 8:43am
This is a very naive way of judging a package of economic policies. Rather one should model them. At the very least, make a hand wave estimate of the aggregate and distributional effects effects, short and long term of each one and sum.
As a first approximation MY guess is that almost all (even the “horrible” ones) would have near zero effect in the short term and modestly negative effects in the long term. Even if one credits a growth bump in 2018 to the higher Federal deficit resulting from the “Tax Cuts for the Rich and Deficits Act of 2017” that really only shows that previous Fed policy had been too restrictive.
David Henderson
Oct 19 2019 at 10:10am
You write:
I granted that this was “rough and ready.”
You wrote:
As you must have noticed when you read the article, I did draw on the CEA’s model of deregulation and the Tax Foundation’s model of the tax cut. Their findings are broadly consistent with my 0.5 percentage point estimate.
You wrote:
Wow! Talk about naive! Your model implicitly allows for no supply-side effect of substantial cuts, on the corporate side, of marginal tax rates. And even if you’re a Keynesian, which you appear to be, you’re trying to apply it at a time when unemployment is well under 5% and sometimes under 4%, and when inflation is under 1%.
Thaomas
Oct 20 2019 at 9:45am
I meant model each (important) element of the package, lower corporate tax +x, higher deficit +/- y, trade war -z, etc. immigration enforcement – q, change in regulation Ri, +ri, i-1, 2, 3, … n
I tried to distinguish, sorry if I did not succeed, the positive effect of the cut in corporate rates (lower dispersion in inter-firm marginal rates of taxation) from the negative long run effects of the cut not being revenue neutral, the higher deficits.
I’m not a “Keynesian” when Fed policy has in fact achieved it’s inflation target and employment target. That was not the case in 2017 ,as I think has now been recognized: the Fed still has not achieved 2% average inflation over any know period. Still, I have been as surprised as many others at the LFPR response to low employment, so perhaps there was a short run “Keynesian” bump” from the higher deficit in 2018.
Alan Goldhammer
Oct 19 2019 at 9:33am
It was our experience that the tax ‘reform’ legislation had us paying a slightly hire amount than the previous year. Perhaps that was a result of the SALT limitation, Maryland be a high tax state. Being seniors, we do get a break on property taxes and without that, our taxes would have been significantly higher as that would have increased taxes that previously were deductible.
Yes, corporate taxes are lower but Federal income from corporate taxes has been going down as a percent of all Federal revenue for a while. My personal belief is that corporate taxes should be eliminated and a broad VAT put in place. There are still far too many tax preferences that allow savvy tax attorneys to minimize the amount companies pay. A bigger question should be whether the increased corporate income is being put to good use. I’ve not observed any significant increases in dividend payout from my investment portfolio (though maybe that will be coming so the jury is out on that one). It’s also not clear that companies are using this money to ramp up R&D as those numbers again have been flat but perhaps could change. One thing it does for sure is offer those on the left a convenient issue to campaign on, though I think they are misguided. I’m all in favor of ‘real’ tax reform with as close to zero tax preferences for everyone!!!!! That’s my campaign slogan.
I’ve commented on past blogs about the ‘deregulation.’ I read the CEA report that is referenced in the full article and the assumptions in areas that I was familiar with were way off. Some of the stuff such as coal mining/use regulations won’t have any impact becuase low cost natural gas power plants are displacing them (witness continuing bankruptcies of coal companies).
TMC
Oct 19 2019 at 1:26pm
Middle class income:
GWB +400 8 yrs
Obama +1043 8 yrs
Trump +5003 <3 yes
Phil
Oct 19 2019 at 3:11pm
Just because his tax cut benefitted you does not mean they were well-designed. I took quite a hit based on his limitation on the deductibility of state and local taxes. I am paying more under his policies than I did previously because I donate a lot to charity and can no longer also claim all of my state and local taxes. Scrooges and those without mortgages benefitted. His policies created a disincentive for individuals to donate to charitable and non-profit organizations to do things that the Left would prefer government to do. In the short run, some of us are hurt. In the long run, all of us are hurt.
David Henderson
Oct 19 2019 at 10:30pm
You wrote:
I agree. I’m not sure why you’re making this point though. In the article, I said not a word about whether they benefit me. I’m not even sure they do, except in the way pretty much all of us will benefit from the corporate income tax cut and the higher capital/labor ratio that will result in.
You wrote:
But given what you said in your previous statement, this is irrelevant, right?
You wrote:
True. I don’t think mortgage interest should be tax-deductible at all. There are good economic reasons for that view.
You wrote:
True. And then the empirical issue is how much those donations will fall. We’ll see.
You wrote:
True.
You wrote:
I think the opposite is closer to the truth.
Thaomas
Oct 20 2019 at 10:44am
The advantage of reducing inter firm dispersion in marginal rates of taxation is clear, but what are the theoretical channels by which a reduction in the marginal tax rate of corporations raise the economy wide capital labor ratio? Does it depend on the reduction being revenue neutral? How much does it depend on attracting net investment from abroad versus increasing in the national savings rate?
IVV
Oct 21 2019 at 2:34pm
If I believed that I would see the resulting impact in greater profitability in my 401(k) and higher wages than the offsetting reduction in spending power that the increased tax instance I must now bear, then I might like its effect. But I doubt I’ll earn more, and I doubt my portfolio will show gains outsize to what they showed previously.
One thing that has been directly catastrophically affected, though, is charitable giving. Now you’ve got a huge class of upper-middle people who now must pay more to deliver the same charitable effect… so maybe they should just be selfish, instead. I honestly don’t like the direction that takes.
Jon Murphy
Oct 20 2019 at 7:24am
This is a good analysis (both in the terms of “I think it’s well done” and “I think the fact this analysis exists does the world positive good.” It’s easy to get swept up in Trump Furor (both for and against) and we need a calming impartial-spectator type voice to look at what is actually happening
Thaomas
Oct 20 2019 at 10:56am
From the point of view of making the tax system approach a progressive consumption tax (or maybe from some other point of view):
What was the advantage of removing the deductability of state and local government taxes? [What was the dead-weight loss that was avoided?]
What was the advantage of using tax deductions rather than partial tax credits to favor certain kinds of consumption — owner occupied housing services, charitable donations.?
TMC
Oct 21 2019 at 1:11pm
“What was the advantage of removing the deductibility of state and local government taxes?”
The good was in the removal of Federal subsidy of local government consumption, or arguably over-consumption. Each state should pay for the consumption they locally vote for.
Thaomas
Oct 24 2019 at 2:13pm
Equity between states seems like a weird criterion.
My question was directed at what economic distortion is eliminated/ameliorated by capping the SLG tax? Where is the dead weight loss that is being reduced?
zeke5123
Oct 21 2019 at 6:29pm
Prof. Henderson,
Good piece, but disagree on territorial. That is how the tax cut was sold, but see 26 USC 951A, or the so-called GILTI regime. When couple with interest expense apportionment, the GILTI regime as currently construed likely results in some kind of residual tax for any US corporation that owns CFCs (i.e., it is worldwide taxing without deferral of the old system). On net, there may be less tax on foreign earnings after taking into account the cost of repat and NPV calcs, but depends on business. For example, some businesses (such as pharma) have a very small non-US ETR and so GILTI can be quite painful.
That doesn’t mean GILTI is bad per se; instead, that it isn’t really territorial. It is Frankenstein’s monster.
Robert EV
Oct 21 2019 at 9:53pm
As a non-econ, I don’t understand this:
Can someone explain?
nobody.really
Oct 22 2019 at 1:12pm
Imagine Joe needs holes dug. So he hires two guys to dig it based solely on their labor–that is, they dig with their bare hands. They complain about their low pay and threaten to quit–but given how slow they work, Joe can’t justify paying them more.
Just before they quit, Joe decide to invest capital–in the form of shovels. Now the guys are much more productive. Joe sees this, and is willing to pay more to keep them from quitting. Voila, increased capital investment leads to increased worker productivity.
But now Joe discovers that he doesn’t need as many workers to get all the holes dug–so he fires one of the diggers (and takes back the shovel).
So now we have one guy producing and earning more–and one guy producing and earning nothing. But the guy who is producing and earning nothing falls out of the statistical measures of productivity, so who cares?
On the campaign trail, Trump complained that Americans don’t make things anymore. That was false. Today, auto workers and miners are vastly more productive than ever, because their work is enhanced with vastly more capital (that is, robots) than ever. But there are vastly FEWER people working in these industries. In sum, the few have gotten richer. And the rest…? They are no longer counted in the automotive or mining statistics.
Robert EV
Oct 23 2019 at 1:43pm
Thanks. That’s kind of what I thought.
nobody.really
Oct 22 2019 at 11:48am
First and primary critique of Henderson’s post, and original article: Longfellow says, “When she was good/She was very, very good…,” NOT “very good indeed.” I see no reason to make a different assessment of Trump.
(Longfellow also says that in the end the little girl gets spanked “most emphatic.” Again I similarly see no reason to make a different assessment of Trump.)
Comments are closed.