There was a widespread feeling that the modern economy had structural constraints that prevented it from breaking out of this narrow range
Before the coronavirus drilled holes in U.. S.. . Prosperity in March, the economy did well. There is not much discussion about this. However, there is a lot of disagreement about how much credit should be used for the guidelines issued during President Donald Trump’s tenure. Bloomberg Opinion columnists Ramesh Ponnuru and Karl W. . Smith found himself on different pages of this question and chatted about it by email.
Ramesh Ponnuru: Karl, you and I are members of a very small club. They are a) business conservatives who b) have been relatively cautious about monetary policy in the context of the debate over the past 10 years, and c) columnists for the Bloomberg Opinion. So it wasn’t surprising that in your most recent column I voted a lot about how Trump’s economy was doing better than Obama’s. The economy was strong during Trump’s first three years in office, and the Democrats fooled themselves by opposing it. I also largely agree with you on which Trump policies should be maintained: tax cuts and a Federal Reserve erring on the low interest rate side.
But I don’t think any of Trump’s directives can support the weight you put on them. Given the trend in unemployment and the growth in gross domestic product, I see neither Trump’s election, his inauguration nor the adoption of the 2017 tax cut as a turning point. What I see are positive trends that just go on. And as in the last extended U. . S.. . Before this boom, in the 1990s, there was a tight labor market in the later phases, which was reflected in broad-based wage increases.
They suggest that Trump’s critics wrongly doubted that he could see 3% growth. But we only have one year of such growth (if you summarize), not the « sustainable » 3% growth that the administration is aiming for. So it seems to me that the people who said it couldn’t be done, or at least it couldn’t be done … were right.
Karl W.. . Smith: I’m glad you agree that the trend in growth rates has continued and that this has drawn people back into the job market. What I am seeing is the trends slowly slowing down in 2016 as one might expect late in any cycle. The Fed did not expect any future improvement in unemployment. The Congressional Budget Office expected economic growth to slow. The San Francisco Fed forecast that the new growth cap would be around 1. 5%. In addition, policies at both the Treasury Department and the Fed focused on reducing the deficit and normalizing interest rates, which meant an increase. Either of these is the usual course of action if you thought you had reached full employment.
If you had believed the consensus at the time, you would have thought that departing from this policy would not have increased employment and instead would have increased inflation and, consequently, long-term interest rates. Trump is deviating from politics – and has lower unemployment and higher labor force participation. Inflation was below the Fed’s 2% target and long-term interest rates were subdued. It seems clear that the predictions that guide conventional wisdom – and politics – were wrong.
I think the only argument is whether Trump deserves credit for that himself. In a sense, that’s a metaphysical question. I tried to get around it by addressing the column to President-elect Joe Biden and saying, « You see, these are results your administration would not have predicted. If you go back to the focus you had before – raising taxes, trying to increase jobs through training programs, and ignoring monetary policy – you will likely see worse results. « It’s hard to see how wrong that is.
RP: There is another problem worth considering: if the economy’s performance is different from the forecast, how much of the difference should be attributed to changes in policy, how much to other changes, and how much to errors in the forecast? The Trump years weren’t the first time forecasters got something wrong, after all. The CBO thought real growth was 1. 4% in 2013; it came at 1. 8th%. It would certainly have been a mistake to conclude that the tax hikes and spending restrictions introduced during this period caused the economy to outperform.
The inevitable mistakes of even the best forecasters are why it can be helpful to look at how the economy is actually performing at different times – as your column did. They found that real median household income has risen by a pathetic zero. 4% from 1999 to 2016 and then increased 9. 2% from 2016 to 2019. Comparing a long period of time to a short period of time can lead to arresting but potentially misleading statistic. If you only look at the 2014-2016 period, you will find a faster improvement in this indicator than under Trump. This also makes me skeptical that we can conclude that policy changes have had a strongly positive impact. But as a conservative, I may be biased to underestimate the power of government policy!
KWS: Your point of view has been well received, and I think, in the end, I argue just as much with the framework that created these forecasts as with evaluations of the policy. For example, household income has been trapped in a small range for decades. In 2014 it was near the bottom of that range, so many economists thought it could and should of course rise. By 2016 it had peaked, so economists became more pessimistic about further improvements.
It was widespread that the modern economy had structural constraints that prevented it from breaking out of this narrow area. Our colleague at Bloomberg Opinion, 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 statements about household income, but they – and others like them – implied that simply increasing demand would not work.
Some theories, such as the one proposed by entrepreneur and Democratic presidential candidate Andrew Yang, suggested that without radical economic restructuring, employment and household incomes would collapse. However, 2018 and 2019 showed that the economy suffered mainly from a cyclical problem and that aggressive countercyclical policies were enough to break this trap.
I see this as weakening the case for government intervention. We don’t need an industrial policy, a free college, or a universal basic income to raise the middle class. We just need to support the free market with adequate demand – preferably from the Fed, but I’ll cut taxes or, as a last resort, even government spending – and entrepreneurs will find a way out of stagnation themselves. Trump’s economy showed, perhaps because of its inability, what private companies could achieve if they were given simple but adequate support.
This column does not necessarily reflect the opinions of the editors or Bloomberg LP and its owners.
Ramesh Ponnuru is a columnist for the Bloomberg Opinion. He is senior editor at National Review, visiting scholar at the American Enterprise Institute, and author of CBS News.
Karl W.. . Smith is a columnist for the Bloomberg Opinion. He was previously vice president of federal policy for the Tax Foundation and assistant professor of economics at the University of North Carolina. He is also a co-founder of the business blog Modeled Behavior.
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