As Donald Trump's tenure in the White House passes the one-year mark this weekend, many are reflecting on a presidency that most people never thought would happen. But away from the daily drama of White House intrigue and tweet-driven fury from the West Wing, another narrative has been unfolding across the country.
The US economy is soaring.
While the economy was growing at an annual rate of 1.2 per cent when Trump assumed office in the first quarter of last year, that had strengthened to 3.2 per cent by the third quarter.
Similarly, the stock market has hit new highs over the past year. This week the Dow Jones reached 26,000 – a new record. Since Trump’s election the index has climbed 7,000 points, about 40 per cent. The S&P and Nasdaq have also broken records.
Employment figures are also positive. The unemployment rate is 4.1 per cent – a 17-year low, according to official data – and the US economy has added 148,000 jobs last month.
There were fears of economic Armageddon when Donald Trump rode to victory on a promise of economic protectionism, but the world's largest economy has been steaming ahead. The so-called "Trump bump", the lift in stock prices when Trump was elected, has continued throughout 2017 and into the first few weeks of 2018.
Unsurprisingly, the president has been quick to claim the credit, tweeting frequently about the latest economic figures. “The reason our stock market is so successful is because of me. I’ve always been great with money, I’ve always been great with jobs, that’s what I do,” he told reporters recently with typical hyperbole.
It’s not so simple, however. As Trump’s detractors have been quick to point out, the economic recovery was already well under way during the Obama administration.
Unlike Obama, who inherited an economy mired in the Great Recession of 2008, Trump took the helm when the economy was already improving and benefited from the upward swing. For example, while the stock market may have reached record highs in the past year, the Dow actually performed better in Obama’s first 11 months in office than in Trump’s, increasing by 29.9 per cent compared with 25 per cent in Trump’s first year.
Further, the US economy is benefiting from an upturn in the global economy more generally, with almost all developed economies, including the euro zone, in growth mode.
Nonetheless, even those who are not fans of President Trump concede that his policies are in some way responsible for the upbeat economic picture.
A survey last week by the Wall Street Journal found that 68 per cent of economists and academics believed Trump deserved credit for the booming economy. Most said that the president was "somewhat" or "strongly" positive for job creation, GDP growth and the stock market boom.
The main reason? The Republican tax bill.
The biggest tax cut ever
In December, the Republican-controlled Congress passed the biggest tax reform in decades, giving President Trump a much-needed legislative victory. The colossal $1.5 trillion tax Bill comprises a suite of tax cuts and spending cutbacks, including a cut in the corporate tax rate to 21 per cent, provisions to encourage US multinationals to repatriate profits from abroad, and a reduction in individual tax rates for ordinary workers.
The sheer speed at which the tax package was passed – Democrats complained that the Bill was barely debated or analysed by Congress – caught many unawares.
But it is the Bill’s potential impact on the US debt and deficit that have left many people worried. The kernel of the Republican argument is that the trillions in lost tax revenue will be offset by the burst in economic growth that will result from the tax plan. Given that Republicans protested for years about ballooning debt levels when Obama was in power, the lack of any costings or proof of these economic predictions is puzzling.
Economists have also questioned the timing of the tax cuts. With the economy running at full kilter, this is the time for cutting down debt, not fuelling an already fiery economy, the argument goes.
Jared Bernstein, chief economic adviser to Joe Biden during the Obama administration and now senior fellow at the Center on Budget and Policy Priorities queries the timing and rationale.
“Given that the economy is already moving towards full employment, is this what the doctor ordered?” he asks.
Anything that has long-term impacts, such as boosting demand, encouraging investment, incentivising labour participation, is welcome any time. The key is to determine the long-term versus short-term impact
Randall Kroszner, a former board member of the Federal Reserve, now a professor at the University of Chicago's Booth School, says it is more complex. "Anything that has long-term impacts, such as boosting demand, encouraging investment, incentivising labour participation, is welcome any time. The key is to determine the long-term versus short-term impact."
Undoubtedly one of the main upshots of the recent tax plan will be its implications for the Federal Reserve’s interest-setting rate policy.
“The Federal Reserve believes that the US economy is closing in on its resource capacity, and it is already raising interest rates – tapping the brakes on growth, if you like. If they see any signs of overheating, that tap may turn to a slam,” says Bernstein.
Kroszner agrees that the Federal Reserve will act, but he predicts that it will take at least six months before the board can really assess the short-term versus long-term impact of the policy changes on the economy.
Much of the debate over the tax bill in recent months has also focused on its impact on ordinary working-class Americans. While the most substantive parts of the Bill focus on corporate tax, it also contains tax cuts for individual workers.
All seven tax rates that apply to individual income have been lowered, including – controversially – the top rate, which will be reduced from 39.6 per cent to 37 per cent. The standard deduction has been doubled, in a boost to individual taxpayers, but this may be offset by the elimination of the personal exemption and the abolition of the popular system that allowed taxpayers to offset their state and local taxes from their tax bill.
But many believe that this is a tax package for the wealthy, in particular through the dramatic cut in the corporate tax rate, which will benefit large business owners, banks and shareholders. The fact that the individual tax changes will expire after 10 years while the corporate tax changes are permanent cements this view.
Republicans have pointed to the concept of “trickle-down” economics – an age-old Republican argument that changes at the top will permeate through the economy.
The Council of Economic Advisers – the in-house economic agency at the White House – estimates that the corporate tax cuts would add $4,000 to the average worker’s pay.
But many disagree. Josh Bivens of the Economic Policy Institute and Washington believes the tax Bill favours the wealthy and corporate America over the average worker.
“Despite claims that it will trickle down to working people, there is no evidence that corporations will do anything with the money they save in taxes other than reward shareholders with more dividends and executives with higher salaries,” he says.
The electoral impact
As the impact of the tax plan begins to filter down to the real economy this year, the key question politically will be whether the strong economy will translate into votes for President Trump and the Republican Party.
While the tax cuts will play well with traditional, mainstream Republicans across broad swathes of the US – tax cuts and a pro-business agenda is straight from the Republican playbook – the picture is more complicated for the millions of white-collar workers in swing states who delivered the presidency for Trump.
The White House has been quick to argue that many small businesses in rural America have benefited from tax reform. This week President Trump visited H&K Equipment, a small business near Pittsburgh that the administration claims has benefited from Trump's "pro-jobs, pro-worker, pro-growth economic agenda".
Virtually all jobs created in the United States since 2009 have been for college-educated workers, while the number of workers with high-school degrees or less has fallen by nearly 3 million
Fiat Chrysler announced this month it was moving production back from Mexico to its Michigan plant, while many companies such as AT&T and Comcast paid bonuses to workers at Christmas, citing the tax changes.
But there is also another story. Last week a new round of job cuts began at the air-conditioning company Carrier’s Indiana plant, a year after Trump claimed he had prevented the company from moving to Mexico. Other problems lurk beneath the big economic picture.
A recent paper by Robert Shapiro of the Brookings Institute notes that virtually all of the jobs created in the United States since 2009 have been for college-educated workers, while the number of American workers with high-school degrees or less has fallen by nearly 3 million.
Worrying job trends
Last month’s job data also contained some worrying trends for Trump. The numbers employed in retail in December were disappointing, in part due to the growth in ecommerce – a concern given that many of Trump’s core working-class base are employed in the field.
Similarly, while mining jobs have increased during Trump’s tenure, according to official data, most of these have been in fields that “support” mining rather than the core activity itself.
As Sheri Berman, professor of political science at Barnard College, New York, points out, the headline economic data often masks a less than homogenous picture: "While on the aggregate level economic trends look pretty good, the problem is that there are lots of groups that are suffering more than others."
Some of the promises Trump made are not feasible. But among supporters this may not matter too much – it's the fact that he listened to their concerns
Nonetheless, this may not affect Trump’s support, she adds. “What we saw during the election was that many of Trump’s core supporters were not motivated by specific details or policy outcomes, but rather a broader anger at the economic system.
“Some of the promises Trump made, like bringing back manufacturing, are not feasible. But among supporters this may not matter too much – it’s the fact that he listened to their concerns.”
Trump’s own divisive style of leadership and string of controversies that have accompanied his presidency, may also limit any upswing the Republican party might gain from the strong economic picture.
Despite the strong economic figures, Trump’s approval ratings across all voting groups remain historically low, suggesting that the economic gains are not translating into votes. This suggests that the Trump brand may be damaging the Republican Party – a worrying development for Republican members of Congress who are facing midterm elections in November.
Where the US economy goes from here is a key question occupying economists, with many analysts wondering how much higher the stock market, which is benefiting heavily from a strong tech sector, can go.
A key trend to watch this year is how incoming Federal Reserve chairman Jay Powell affects monetary policy.
The world may get a closer insight into Trump’s plans for the world’s largest economy when the president attends the World Economic Forum in Davos next week.
In a surprise move, the US president is attending – the first time in 18 years that a sitting US president is attending the annual gathering of the global elite.
Much will depend on the tone he takes at the summit. Is his attendance a sign he is capitulating to the norms of global capitalism despite his protectionist promises of America First during the campaign? Or will he use the platform to restate his intention to dismantle trade deals that he feels have been disadvantageous to the US?
Whatever his policy objectives, the optics of Trump’s visit to Davos will be important as he looks to shore up the continued support of his base. The image of a billionaire businessman mixing with the world’s political and economic elite, may not be what the White House needs as the US president looks ahead to the 2020 presidential elections.