by Dr. Roy Cordato
Senior Economist, Emeritas
Since President Trump has taken office, economic growth rates have soared, 4.2 percent in the last quarter, and unemployment rates are the lowest in decades, at present 3.7 percent. In response to these impressive economic statistics, Democrats, and former President Barack Obama, in particular, have argued that, in spite of the fact that economic growth hovered around 2 percent during the Obama years, what is happening now is just part of an economic boom produced by Obama administration policies coming out of the 2008 recession.
The central part of the Democratic argument, to the extent that one is ever made, is that the reason Obama’s policies took eight years to bear significant fruit is that the recession he inherited was so unusually deep. President Trump just happened to take office as the economy was poised to take off anyway.
The problem with this argument is that no part of it matches up with sound economic analysis. First of all, there is no theory of business cycles (the booms and busts of the economy) or of the causes and remedies for recessions that argues that deeper recessions necessarily produce slower growth rates and prolong recovery. What is amazing to me is how often this argument is made and accepted at face value in defense of the slow growth during the Obama years, as if the logic behind the assertion were self-evident.
In fact, one would expect an economy in deep recession to bounce back rather quickly, so long as impediments are not put in the way of investment and entrepreneurship. The most basic characteristic of a recession is the presence of idle resources such as labor and capital, which are less costly than fully employed resources. The possible use of unemployed resources presents the potential for more profitable investments. A great example was the recessions of 1920-21 which was much worse than the 2008 recession. After hitting an unemployment rate of around 11 percent by 1923 and as high as 15 percent in some places, the economy was back down to its full employment level of around 5 percent. The average rate of economic growth from 1924 to 1929 was around 7 percent.
This takes us to the second claim often made by Democrats: it was Obama’s policies that pulled the country out of the recession in the first place. The fact is that Obama’s policies may have prolonged the period of slow growth during his eight-year tenure. First, there was his nearly $1 trillion stimulus package, which was supposed to provide a short-term boost to the economy during the spring of 2009. The Obama administration promised that it was going to bring unemployment down from about 10 percent to below 8 percent in six months. The fact is that unemployment under Obama never fell to below 8 percent until almost two years after the stimulus package was passed and implemented. For a host of reasons, this policy never stood a chance of working and, in fact, was counterproductive.
But the 2009 (anti) stimulus package was not the only drag on the economy during Obama’s eight years. In 2013, Obama raised taxes on top income earners both increasing the top marginal rate and the capital gains rate. Not even a liberal Keynesian economist would suggest raising taxes while unemployment is well over 7 percent, as it was for nearly all of 2013. Adding to these anti-growth tax and spending policies were Obamacare mandates and considerable increases in business and financial regulations, which universally increased the cost of doing business for everyone. It is clear to anyone who understands how economies work that Obama’s policies were holding the economy back, not pushing it forward. It is quite likely that the only thing keeping GDP growth in positive territory during the Obama years was the artificially low interest rates and expansive monetary policies of the Federal Reserve.
In January of 2009, I argued that if the then-Democratic Congress and President Obama really wanted to pull the economy out of the recession and put it on a solid and sustainable growth path, it should pursue “tax cuts…focused on reducing the cost of entrepreneurship, saving, and investment, i.e., cuts in marginal tax rates, capital gains, and corporate income taxes. There should also, at the very least, be a moratorium on all new regulatory programs. A cap-and-trade scheme to fight global warming should be off the table.”
When Donald Trump took office in 2017, this is mostly what he and Congress did. I say “mostly” because, disappointingly, capital gains taxes were not reduced, and he has added some new taxes via his unwise trade policies. In spite of these decisions, the economy has jumped from 1 – 2 percent annual growth rates to 3 – 4 percent, and unemployment rates have dropped to the lowest in decades among all demographic groups as a result of reducing taxes and regulations overall.
The reality is that there was a clear and sharp change in the direction of economic policy between the Obama and Trump years, and it is this change – and not any policy that Obama was responsible for – that is generating the current growth and prosperity. The fact is that Obama’s tax, spending, and regulatory policies acted like a wet blanket covering the economy. Over the past two years, that wet blanket has been lifted, increasing economic freedom and thereby opening up new investment and entrepreneurial activities. And as is always the case, it is this kind of activity guided by consumer preferences that lift economies and generates new wealth and prosperity.