Dayton Daily News

Trump’s economic ‘gains’ likely won’t help him win

- Paul Krugman Paul Krugman writes for the New York Times.

I’ve seen a number of people suggest that the 2020 election will be a sort of test: Can a sufficient­ly terrible president lose an election despite a good economy? And that is, in fact, the test we’d be running if the election were tomorrow.

On one side, Donald Trump wastes no opportunit­y to remind us how awful he is. His latest foray into overt racism delights his base but repels everyone else. On the other side, he presides over an economy in which unemployme­nt is low and real G.D.P. grew 3.2 percent over the past year.

But the election will be an exhausting 15 months from now. Trump’s character won’t change, except possibly for the worse. But the economy might look significan­tly different.

So let’s talk about the Trump economy.

The first thing you need to know is that the Trump tax cut caused a huge rise in the budget deficit, which the administra­tion expects to hit $1 trillion this year, up from less than $600 billion in 2016. This tidal wave of red ink is even more extraordin­ary than it looks, because it has taken place despite falling unemployme­nt, which usually leads to a falling deficit.

The imminent fiscal crisis keeps not happening: Long-term interest rates remain low.

Now, the evidence on the effects of deficit spending is clear: It gives the economy a shortrun boost, even when we’re already close to full employment. If anything, the growth bump under Trump has been smaller than you might have expected given the deficit surge, perhaps because the tax cut was so badly designed, perhaps because Trump’s trade wars have deterred business spending.

For now, however, Deficit Man is beating Tariff Man. As I said, we’ve seen good growth over the past year.

But the tax cut was supposed to be more than a short-run Keynesian stimulus. It was sold as something that would greatly improve the economy’s long-run performanc­e; in particular, lower corporate tax rates were supposed to lead to a huge boom in business investment that would, among other things, lead to sharply higher wages. And this big rise in longrun growth would supposedly create a boom in tax revenues, offsetting the upfront cost of tax cuts.

None of this is happening. Corporatio­ns are getting to keep a lot more of their profits, but they’ve been using the money to buy back their own stock, not raise investment. Wages are rising, but not at an extraordin­ary pace, and many Americans don’t feel that they’re sharing in the benefits of a growing economy.

And this is probably as good as it gets.

I’m not forecastin­g a recession. It could happen, and we’re very badly positioned to respond if it does, but the more likely story is just a slowdown as the effects of the deficit splurge wear off. In fact, if you believe the “nowcasters” (economists who try to get an early read on the economy from partial data), that slowdown is already happening. For example, the Federal Reserve Bank of New York believes that the economy’s growth was down to 1.5 percent in the second quarter.

And it’s hard to see where another economic bump can come from. There won’t be another big tax cut. The Fed may cut interest rates, but those cuts are already priced into long-term interest rates, which are what matter for spending.

Which brings us back to the 2020 election. As far as the economy, odds are that Trump’s deficit-fueled bump came too soon to do him much good.

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