Don’t Be Shocked If Trump’s Economy Goes the Way of Bush’sBloombergOpinion
(Bloomberg Opinion) -- Although the economic contexts for the start of the Donald Trump and George W. Bush administrations were very different, both presidents responded with essentially the same economic formula — tax cuts, higher spending and aggressive deregulation.
In both cases, as expected, the economy responded to the stimulus with boosted growth of stocks and gross domestic product. For Trump, the good numbers on unemployment, GDP and stocks were more immediate, owing to the much more favorable economy when he took office, than they were for Bush.
Both presidents were also offered a similar opportunity: to put the nation’s finances on more solid ground. What happened under Bush may give us a window into what is coming in the next few years.
When Bush took office, there was a slowing economy, and the stock market was declining. Unemployment was low but rising.
There had also been four straight years of budget surpluses, 1998 to 2001, under President Bill Clinton. As a result, the debt was shrinking fast as a percentage of GDP. Economists even mused about the possible evaporation of the U.S. bond market. In 2001, the national debt stood at 54.8 percent of GDP.
Trump inherited a very different economy. Unemployment was falling (4.4 percent in 2017 from a 2010 high of 9.6 percent) amid a historically long expansion albeit at growth rates that were below average for the post-World War II period. Deficits had dropped from a high of $1.4 trillion to around $650 billion — still high, but falling as the expansion continued. Still, the national debt stood at 104.8 percent of GDP.
The Bush Effect
After Bush took office, tax cuts were phased in over three years, 2001-03, cutting marginal rates at all levels. At the same time, government spending as a share of GDP, which began at 17.7 percent in 2001, increased throughout his administration, peaking at 24.4 percent in 2009, his administration’s last budget.
Economic growth was sluggish for two years, then picked up in the third year of the tax cut, with GDP reaching 2.9 percent. At the same time, the budget went rapidly from surplus to deficit. By election year 2004, the deficit had climbed to $412 billion, a swing of more than half a trillion dollars since the last surplus in 2001.
By 2004, growth was a robust 3.8 percent. The economy crested at just the right time for the incumbent president, who was vulnerable because of his controversial decision to invade Iraq the year before.
During this period, there was a general antipathy toward government regulations in most sectors of the economy, whether finance, energy or environmental controls. “The White House, in the view of critics, fostered a free-market hothouse in which these [borrowing] excesses were able to flower,” the New York Times wrote in September 2008. “It avoided regulation of banks and mortgage brokers, leaving much of that work to the Federal Reserve, which, under Alan Greenspan, showed little appetite for regulation.”
Then the economy dissolved, leading to the worst recession since the Great Depression. By 2009, GDP had fallen by 2.5 percent, and average unemployment jumped from 5.8 percent to 9.3 percent in one year. The Bush administration ended with a $1.4 trillion deficit, 9.8 percent of GDP.
The government began to bail out the banks in 2008, and the new Obama administration used further Keynesian stimulus to halt the freefall by 2010.
Trump’s Fiscal Path
Fast forward to Trump. In 2017, with the eight years of President Barack Obama’s policies mostly still in place and before any of Trump’s policies could really kick in, the economy grew at 2.2 percent. GDP growth rose by 2.9 percent in 2018.
To get that “extra” growth, there was pretty good jolt of Keynesian stimulus. Federal taxation fell from 17.2 percent of GDP in 2017 to 16.5 percent in 2018, and is estimated to fall to 16.1 percent for 2019. Spending fell a little in 2018 to 20.3 percent of GDP from 20.7 percent in 2017, but will jump to 21.3 percent in 2019.
The net outcome is that Trump’s policies resulted in one year of modest incremental growth at a cost of large increases in the deficit: from $665 billion in 2017 (3.2 percent of GDP), up to $779 billion in 2018, Trump’s first budget (3.8 percent of GDP), and $1.1 trillion in 2019 (5.1 percent) of GDP.
A 5.1 percent budget deficit in an economy with only a 3.9 percent unemployment rate — that is a strange pair of numbers. As the director of the Congressional Budget Office, Keith Hall, pointed out in late January, the high deficits mean that lawmakers will have less flexibility to use tax and spending policies to respond to unexpected challenges. It also means less money for investments in education and infrastructure that really do produce long-term growth.
If the $2 trillion infrastructure investment that Democrats and Trump appear to want is to become a reality, Trump may well have to undo a good chunk of his 2017 tax cut.
The Bush-Trump similarity holds for trade deficits as well. Bush saw the trade deficit grow from $375 billion in 2001 to $619 billion in 2004 (and peaking at $771 billion in 2006). From the start, Trump pledged to implement a trade strategy that favors U.S. exporters over importers, thus improving the trade deficit.
So far, that policy is not working out too well. Since 2016, the trade deficit for goods and services has steadily risen from $521 billion to $625 billion in 2018, with an $891.1 billion gap for goods only, an all-time record. The trade deficit for 2019 is expected to be even higher. It seems that Trump’s anti-free trade policy has performed no better than Bush’s free-trade policy when it comes to the trade deficit.
Is deregulation under Trump buoying the economy? The conservative American Council for Capital Formation did note that, “The flow of new regulations under the Donald Trump administration has been much smaller than observed during the Barack Obama and George W. Bush administrations.”
The group also noted that deregulation would be going faster at the administration’s two-year mark, were it not for the slowdowns in the courts.
Trump boasted that his administration is eliminating 22 regulations for every new one. The credibility of that claim aside, it is not the number of regulations removed that is the best measure of the effectiveness of deregulation. It is whether the process is successful in balancing costs and benefits. Wise or not, the stock market seems to have welcomed the prospects of a less regulated economy, despite the possible negative consequences for the environment and financial risk
There are longer-term concerns. The Washington Post noted the rise of risky leveraged lending: “Financial companies issued a total of $1.271 trillion in leveraged loans in 2017 and 2018, 40 percent more than in 2015 and 2016, according to S&P Global Market Intelligence. More than 80 percent of the loans made in 2018 were made with fewer restrictions on the borrower and fewer protections for the lender in the event the loan falls into default.”
Financial risk may also be creeping in at the ground level with the administration’s weakening of the Consumer Financial Protection Bureau. There has been an 80 percent drop in enforcement actions from the peak in 2015 to 2018 (while monetary relief for consumers fell by 96 percent per case) amid rising consumer complaints regarding credit cards and student loans. There have also been recent efforts to roll back restrictions on payday lenders.
The CFPB had been established under Dodd-Frank for the purpose of reducing predatory practices that contributed to the 2008-09 financial crisis.
What Comes Next?
Just because similarities exist between the economic policies and results in the early period of the Bush and Trump presidencies does not mean that history will repeat itself. Trump inherited a stronger economy and bigger national debt than Bush did, and those factors may affect his longer-term performance. But if the Trump economic record turns out to be similar to Bush’s, it should not come as a surprise.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Richard J. Carroll is an economist for international financial institutions including the World Bank. He is the author of "The President as Economist: Scoring Economic Performance From Harry Truman to Obama."
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