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President Donald Trump regularly and proudly takes credit for the US economy’s strong performance.
With rapid growth in the second quarter, the stock market strong, the unemployment rate back below 4 per cent and the midterm elections looming, his rhetoric and that of his supporters will probably escalate in the coming months.
In fact the approval the US president enjoys is boosted more by the strong economy, than the other way around. This conclusion will only be reinforced if Mr Trump’s current steps towards a trade war retard US economic performance, as is increasingly feared. A variety of observations are pertinent.
First, history suggests that presidential popularity rises with declining unemployment. It is reasonable to suppose that, if unemployment were at its long-term level of 5.5 per cent, instead of its current 3.9 per cent, Mr Trump’s approval rate would fall lower than its already anaemic level. As it is, his approval ratings are worse than those of any first-term president with an unemployment rate under 5 per cent.
Second, such acceleration of growth as we have observed is well within the normal range of growth forecast errors. Before the 2016 election, when the Trump presidency was not anticipated, consensus forecasts for the US economy were 2.2 per cent for 2017, and 2.1 per cent for 2018. The actual outcome in 2017 of 2.2 per cent and the consensus forecast of 2.8 per cent for 2018 do not represent a statistically significant fluctuation from the mean.
Third, it appears that growth has accelerated and exceeded expectations more outside the US than within the country, suggesting that whatever is driving America’s growth is a global factor, rather than something for which US policy can take credit. For 2017, the country’s growth exceeded expectations by less than for the world as a whole, or for China, Europe or Japan. For 2017 and 2018 taken together, US growth looks likely to exceed expectations by less than world growth.
Fourth, market evidence calls into question the idea that the US has become a highly attractive place to invest because of Mr Trump’s policies. Net foreign direct investment in the US in the first quarter of 2018 was down nearly two-thirds against the first quarter of 2016.
Goldman Sachs analysts have demonstrated that US companies which do more business abroad have outperformed those that are more domestically focused. And there is the basic observation that before trade war fears took hold, the dollar had declined during the Trump presidency.
Fifth, the underlying reason why the US economy is strong right now is that it has been possible to run a very taut economy with unemployment below 4 per cent and not face significant inflationary pressures. No one is quite sure why this should be. It is probable that some combination of globalisation, technology, and the reduction of employee power as unions have weakened have changed the inflation process. It is hard to see why Mr Trump deserves credit for these structural changes, which have been happening for a long time.
Sixth, there is what Ben Bernanke, the former Federal Reserve chairman, has labelled the “Wile E Coyote” issue, after the accident-prone cartoon character. It may well be that an element of current success that can be attributed to Trump administration policy is borrowing prosperity from the future. This is most obvious in the case of the soyabean exports that were accelerated to avoid tariffs, but it is fairly ubiquitous.
Increasing fiscal stimulus is like a drug with tolerance effects — to keep growth constant, deficits have to keep getting larger. Some combination of gathering foreign storm clouds, the end of growing fiscal stimulus and the delayed effect of tightening monetary policies may converge to slow or end the expansion.
The choices this administration are making invite foreign retaliation against US exporters and use up fiscal capacity even as the economy is growing rapidly. Because of this, and because there is limited room for monetary policy, the country will not be in a position to respond strongly if a downturn comes. All the more reason, therefore, why we should avoid pulling demand forward.
This is all quite dangerous. The president has taken credit for far more economic success than he deserves. He will disproportionately be blamed when the downturn comes. What follows will be a test of our democracy.
The writer is Charles W Eliot university professor at Harvard and a former US Treasury secretary
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