Economists typically argue that the president has
little effect on the economy. But it’s hard to think of a recent president for whom that is
less true than Donald Trump. From the
record-breaking expansion to the mini-recessions in
manufacturing and housing, the U.S. economy is undeniably Trump’s.
For the last three years, Democrats have argued that Trump inherited a great economy from Barack Obama and has done very little to alter its course. Job growth under Trump, they often point out, has been roughly equal to (or slightly less than) job growth during most of Obama’s tenure.
The fundamental problem with this comparison is that Obama led the country out of a recession — precisely when job growth should be strongest. By contrast, Trump entered office near what many observers considered full employment, at which point job growth is usually seen as limited to population growth.
Late in an expansion, as the U.S. was when Trump took office, economies are also far more vulnerable to recession. Indeed many economists,
myself included, have been warning about the possibility of one for
a few years.
That’s not because expansions die of old age; theoretically at least, there is no reason why an economy ever has to go into a recession. But the longer an expansion, the more likely it is that politicians will prioritize reducing deficits or preventing inflation over sustaining growth. (This was the case with both the White House and the Federal Reserve during the Obama administration.)
Trump, however, has pursued an aggressively expansionist economic policy, starting with 2017’s Tax Cuts and Jobs Act. That law had two effects: It provided a long-term incentive for businesses to increase investment, and it provided a short-term boost to the economy by putting more money in consumers’ pockets.
At the time there was fear that the second effect would be
offset by large budget cuts. Yet Trump ignored concerns about the deficit and agreed to both more military and domestic spending.
It’s difficult to overstate how unorthodox this approach was. Obama spent much of his presidency fighting with Republicans over which tax increase they would accept in exchange for budget cuts. That’s precisely what
conventional wisdom would have expected Trump to do. Instead, he has presided over the
largest peacetime expansion of the budget deficit in three-quarters of a century.
At the same time, Trump has undercut the expansion with two equally unconventional policies. First, the Tax Cuts and Jobs Act capped the deductions for home mortgage interest and for state and local taxes. These deductions have long been the bane of economists, but were considered sacrosanct because of their potential impact on housing. While the direst predictions of a
blue-state apocalypse were wrong, residential investment
was notably soft in the high-income coastal cities most affected by the cap.
Second, Trump has reversed the U.S.’s longstanding policy in favor of free trade. The resulting trade war has led to weakness in the export and manufacturing sectors, particularly in the Midwest.
It remains to be seen whether Trump’s expansionary policies will have a greater effect than his contractionary ones. The president has been lucky so far, and the most
recent data seems
encouraging. But wherever the economy ends up, it’s clear that Trump’s policies will have been a driving force.
