The American economy remains in one of its longest recoveries in history. Does President Trump deserve the credit?
The memory of the 2007 financial meltdown fades. Unemployment is down. Incomes are beginning to increase. Consumer spending, the driver of the economy, is picking up. The recovery, begun years ago, remained strong during Trump’s first year in office.
A close look reveals a far more complicated explanation for the recovery in which Trump plays only a surprisingly small part.
Government is a player in the economy, but does not drive it. Businesses and individuals decide on its direction. Their actions don’t all head the same way at the same time. In a free enterprise society, the big decisions are not made by government, though it provides incentives and controls.
Government economic action is composed of two elements, fiscal policy and monetary policy. The president and Congress manage fiscal policy – taxes and spending, while the Federal Reserve, independent of the president, runs monetary policy – interest rates and the supply of money.
From the moment he took office in 2009, President Obama tried to boost government spending to stimulate the economy. At first, he was successful, and Congress agreed to a $787 billion stimulus. Republicans opposed any added government efforts, arguing they would increase the national debt.
Fiscal policy would go no further, leaving recovery to the Federal Reserve. Under recently departed Fed chair Janet Yellin and her predecessor, interest rates were cut close to zero and the money supply expanded. The Fed made it easier for people to borrow and then spend to boost the economy.
Yellin’s team managed to promote growth without high inflation. While personal income did not grow much, neither did prices.
Most presidents reappoint a Fed chair to a second term even if he or she is a member of another party. But Trump wanted to put his own stamp on the office. He picked a person remarkably similar to Yellin, but who might give Trump some room to claim credit for the appointment and for monetary policy.
Trump’s contribution to recovery was limited to his signature on a tax cut bill entirely developed by others, the congressional GOP. The bill created expectations that money saved on taxes will grow the economy, thus producing more tax revenues. Meanwhile, it increases the national debt far more than Obama’s proposal would have.
Trump has taken credit for economic gains, including some under Obama. The same positive statistics he scorned as a candidate, because they made Obama look good, he now claims have become accurate under his regime.
Putting presidential politics aside, Yellin deserves more credit for the recovery than either president.
Government spending sets the priorities for only a portion of the economy. Obama’s effort promoted basic developments like roads and hospitals. Tax cuts allow companies and people to set their own priorities, which do not usually include public works. That’s why more money will be needed for those purposes.
Consumer spending may increase, but what people buy may be more expensive. Trade policy is beginning to have the effect of raising the price of imports, which are a large part of our shopping carts.
One other problem with the recovery is that its benefits are uneven. Most economic gains have gone to the top 10 percent, while incomes for others have been relatively flat. Even if the 90 percent is beginning to see some progress, they have a long way to go to close the gap.
The same kind of gap also exists between urban and rural areas. Gains have been going to areas classified as urban and not to rural America. According to the census, Maine has fewer people living in urban areas than any other state. So many Mainers still await the chance to catch up.
Beyond taking credit for the economy, Trump has boasted of the big increases in stock prices, the “Trump Bump.” However, despite impressive gains, the stock market’s future is unclear. It is quite different from the economy. Speculation, normal in investing, is unlike decisions about what goes in the shopping cart.
The stock market can swing rapidly. Investors are now worried about higher interest rates and wage growth that will boost prices, causing inflation, and harming some corporations.
A president’s risk in claiming credit for the economy or stock market that he or she doesn’t really control puts the president in line for the blame when either declines, which is inevitable.
Modesty, now in short supply, would be a good idea.