Trump hasn’t prepared us for the slowdown
By LAWRENCE H. SUMMERS | Special To The Washington Post | Published: August 7, 2018
President Donald Trump regularly and proudly takes credit for the U.S. economy’s strong performance. And with rapid growth during the second quarter, the stock market strong, the unemployment rate back below 4 percent and the midterm elections looming, Trump’s rhetoric and that of his supporters will probably escalate in coming months.
In fact, however, the president receives more of a boost from the strong economy than the other way around. This conclusion will only be reinforced if Trump’s current steps toward a trade war retard U.S. economic performance, as is increasingly feared. A variety of observations are pertinent.
First, history suggests that presidential popularity rises with declining unemployment. It is reasonable to suppose that, if unemployment was at its historical average of 5.8 percent, instead of the current 3.9 percent, Trump’s approval rating would fall lower than its already anemic level. As it is, he is less popular than any first-term president with an unemployment rate less than 5 percent.
Second, the acceleration of growth as we have observed is well within the normal range of growth forecast errors. Before the 2016 election, when a Trump presidency was not anticipated, consensus forecasts for the U.S. economy were 2.2 percent growth for 2017, and 2.1 percent for 2018. The actual outcome in 2017 of 2.2 percent and the current consensus forecast of 2.8 percent for 2018 do not represent a statistically significant fluctuation from the mean.
Third, it appears that growth has accelerated and exceeded expectations to a greater extent outside the United States, suggesting that whatever is driving America’s growth is global, rather than something for which U.S. policy can be credited. While the United States met its expectations for 2017, other parts of the world — including China, Europe and Japan — exceeded expectations. And, looking at 2018 estimates, the U.S. growth rate improvement looks likely to lag behind the world once again.
Fourth, market evidence calls into question the idea that the United States has become a highly attractive place to invest because of Trump’s policies. Net foreign direct investment in the United States was down nearly two-thirds in the first quarter of 2018 over the first quarter of 2016.
Goldman Sachs analysts have demonstrated that U.S. companies that do more business abroad have outperformed those that are more domestically focused. And there is the basic observation that, even before trade war fears took hold, the dollar had declined during the Trump presidency.
Fifth, the underlying reason the U.S. economy is strong right now is that it has been possible to run a taut economy with unemployment below 4 percent and not face significant inflationary pressures. No one is quite sure why this is the case. It is probable that some combination of globalization, technology and the reduction of employee power as unions have weakened have changed the inflation process. It is difficult to see why Trump deserves credit for these structural changes, which have been happening for a long time.
Sixth, there is what Ben Bernanke, the former Federal Reserve chairman, has labeled the “Wile E. Coyote” issue, for the cartoon character with a penchant for heedlessly sprinting off the edge of cliffs. It may well be that an element of current success that can be attributed to Trump administration policy is borrowing prosperity from the future. This is most obvious in the case of the soybean exports that were accelerated to avoid tariffs, but it is fairly ubiquitous.
Fiscal stimulus is like a drug with tolerance effects; to keep growth constant, deficits have to keep getting larger. Some combination of gathering foreign storm clouds, the end of growing fiscal stimulus and the delayed effect of tightening monetary policies may converge to slow or end the expansion.
The choices this administration is making invite foreign retaliation against U.S. exporters and use up fiscal capacity — even as the economy is growing rapidly. Because of this, and because there is limited room for monetary policy, the country will not be in a position to respond strongly if a downturn comes. All the more reason, therefore, to avoid pulling demand forward.
This is all quite dangerous. The president has taken credit for far more economic success than he deserves. He will disproportionately be blamed when the downturn comes. What follows will be a test of our democracy.
Lawrence H. Summers is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and an economic adviser to President Barack Obama from 2009 to 2010.