Recently I wrote about how the 2024 election turned out to be a referendum election, with voters expressing a strong anti-incumbency sentiment directed against Democrats. Of particular salience to those voters was the economy. Although the rate of inflation had eased towards the end of the Biden Presidency and economic indicators were largely healthy, years of high inflation hurt personal finances. Voters did not believe Biden was doing enough to address high prices and so they turned their economic hope to Trump.
Now that we are two and a half months into Trump's second term and Liberation Day has come and gone, eliminating trillions of dollars of wealth from the stock market in the process and sending the bond interest rate up as foreign investors pull their funds out of the dollar I thought a retrospective could be worthwhile. Not to the campaign; even though the tariffs ultimately imposed on Trump's Tariff Day were much more severe than he signaled during the campaign, anyone paying attention would have told you that Trump was committed to the policy of universal tariffs and it would be detrimental to the economy.
Further, Trump's other policies, namely, mass deportations, would be a drag on the economy as well. Immigrants work jobs in America that Americans are unwilling to work and at rates that Americans would be unwilling to work for. Further, they are paying taxes into a system which they know they will not be the beneficiaries of and are consumers in our communities. To be clear, this is not an endorsement of our current system of immigration and the treatment of migrant labors in this country, but Trump's solution is not only inhumane, its economic self-harm.
No, I do not want to look at what the campaign positions were because most Americans were not paying attention. They felt the impact of inflation and remembered back to the last time the economy was good, under Trump in his first term. Trump is more than willing to reinforce this belief, claiming the American economy was the best the world had ever seen before COVID, so lets take a look at a few of those claims.
Staring with unemployment. Trump will claim that he is the reason for strong employment numbers from 2016 through to the beginning of 2020. To be sure, the unemployment rate was historically low, but looking at the unemployment rate since 2007 there is no clear indication of when Obama's presidency ended and Trump's began. In fact, the unemployment numbers continue on a steady trajectory that began under President Obama.
Next, looking at inflation. Trump has claimed that America has no inflation during his first term. While that is obviously false, inflation was within the traditional healthy band of 1% - 3% during his presidency. But this too was the range for much of the preceding eight years.
Lastly, looking at Gross Domestic Product. Not only will Trump brag about the number of jobs he created, but the economic growth the nation enjoyed during his first term. Again, Trump is not wrong, GDP growth was strong. Again, however, this was a clear continuation of a trend that began under the Obama administration.
Importantly, when examining these graphs, I have been omitting 2020; we see unemployment spike, GDP crater, and inflation start to rise in 2020 while Trump is still President. However, this was the direct result of the global shutdowns in response to the COVID-19 pandemic. A global pandemic is hardly the fault of Trump, and the response to the crisis from other foreign leaders was far outside his control. Though I think Trump is to blame for many mistakes he made during this period, a global economic crash is not one of those mistakes. So thought I think it is fair for Trump to claim that up-to 2019 he oversaw a strong economy, though one might channel President Obama and retort, "you didn't build that!"
Now, you may have noticed that I said "up-to 2019"; if we were to look closely at the GDP graph above we can see there is a slight dip in 2019 just before the pandemic lock downs took effect. So lets look into that dip and what caused it.
From his first term Trump is able to claim only a very few policy achievements; among them his tax cuts and tariffs against China. At the time I argued against both of these policies. Turning to the tax cuts first. Trump's tax cuts largely benefited the upper class, with some moderate cuts for the middle class and fewer for poor Americans. At the time the argument was that the recovery from the 2008 financial crisis overseen by the Obama administration was too slow and what was holding back the economy was high tax rates on corporations preventing them from investing in research & development, capital improvements, and their workers.
There are a few problems with this line of argument though. First, part of the reason the recovery was slow was because Republicans in Congress insisted on austerity measures to cut government spending in order to get the federal deficit under control. Then President Obama argued that with historically low interest rates now was the time for the government to borrow money to kick start the American economy, any deficit spending would be paid back at a lower interest rate. Republicans rejected this form of direct government stimulus and instead, eight years later, would run a deficit when interest rates were higher to stimulate an economy that had largely recovered from the earlier financial crisis.
Second, in the years leading up to the ratification of the Tax Cuts and Jobs Act (TCJA) corporate cash on hand was increasing; a strong suggestion that high tax rates were not hobbling corporations' ability to generate cash which they could then invest in their businesses.
Further, corporate merger and acquisition activity had been increasing leading up to 2016, again suggesting companies had no problems investing prior to the tax cuts.
These were the arguments I made before the TCJA was enacted. After ratification businesses took the additional profits from their reduced tax liability and repurchased their own shares at record levels. These stock buybacks do not benefit the workers of these companies or improve productivity and efficiency, they instead benefit the corporation's shareholders–importantly the executives who receive stock compensation.
Now turning to tariffs on China. Trump's justification for placing tariffs on China was because they were manipulating their currency and had unfair labor practices which disadvantaged American companies and workers, resulting in a trade deficit. He had me until the trade deficit because, well, Trump does not actually understand trade deficits. An important piece of context; at the same time that Trump was railing against Chinese economic practices he torpedoed the Trans-Pacific Partnership (TPP) which would have created an economic framework between the United States and 11 other nations–Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. This agreement in particular would have given President Trump significant leverage to negotiate different trade terms with China.
Furthermore, Trump pulled out of the North American Free Trade Agreement (NAFTA) with Canada and Mexico. We could have a debate on the merits of NAFTA, but what replaced it, the US-Mexico-Canada Trade Agreement was not wholly different from NAFTA meaning we strained our relationship with too of our closest trading partners to put back in place the same deal which existed before.
Trump expressed that his goal was to get China to change their trade practices and we have every reason to believe that was his intent. However, the better approach would have been to gather our allies in Europe and the Pacific and as an economic block impose tariffs on China. Instead Trump started a trade war with China that China was able to navigate around because we were acting alone.
This sets the stage and lets us come back around to the dip seen in GDP in 2019. Looking at industrial production specifically we can see this drop off, well before COVID.
And zooming in on 2019 we can more clearly see this decline.
What this graph shows is that the US manufacturing sector was in a recession 2019 and it was a direct result of Donald Trump's trade policies. While the TCJA may have delayed this recession, it was not enough to prevent it all together.
At the same time US farmers were going bankrupt at the highest rate since the 2008 financial crisis. Again the TCJA was not sufficient to offset the losses due to the trade war with China and the Trump administration stepped in to provide additional relief in the highest level of subsidies to farmers in 14 years. This, again, was a direct result of Trump's economic polices.
So where does this put us at the end of 2019; our manufacturing sector is already in a recession and farmers are going bankrupt at elevated levels, but before these weaknesses were able to spread throughout the economy, resulting in a general recession COVID-19 effectively shut down the global economy. As a result, the economic turbulence that followed was blamed on COVID and not Trump's policies. This allowed Trump to return, four years later, after inflationary pressures and pitch a return to the period of his economic prosperity. No one had realized that when we tried his economic policies the first time they had failed.
