The economy under President Trump
Trump’s presidency is a year and a half old. The economic policy of any president — Trump included — is assessed chiefly by the rate of growth of real GDP — gross domestic product net of inflation.
For the era extending from President Kennedy to President Trump (19612018), the average annual growth rate of real GDP was calculated at three percent. The real GDP growth rate surpassed the three percent mark only during the administrations of Kennedy-Johnson — 4.9 percent, Carter — 3.3 percent, Reagan — 3.5 percent, and Clinton — 3.9 percent. However, during the Obama presidency, extended from 2009 to 2016, real GDP has been growing annually at a paltry average rate of 1.5 percent.
Will Trump’s presidency usher in a period of high economic growth? The real GDP growth rate in 2017 — Trump’s first year in office — was only 2.3 percent. At first blush, 2.3 percent does not look promising. However, in the case of some previous administrations, the elected president’s first year in office yielded a relatively low growth rate. Also relevant to this discussion is Trump’s tax cuts in December of 2017, his first year in office.
During the recent halfcentury, three presidencies persuaded Congress to pass a major law that reformed and cut taxes: First, Democrats John F. Kennedy and Lyndon Johnson in 1964; second, conservative Republican Ronald Reagan in 1986; and, third, moderate Republican George W. Bush in 2003. In all three cases, in the wake of the tax cuts, the rate of growth of real GDP accelerated significantly for two to three years, the rate of unemployment declined for three years and the effect of fast-growing output easily overcame the reduction of tax collected per dollar of GDP for three to four years. Consequently, an additional bonus was that the federal deficit fell rapidly.
President Trump has joined the three great tax cutters. In December of 2017, he persuaded Congress to pass the “Tax Cuts and Jobs Act” and, as soon as he could, he signed it into law. The most important section of this law is the reduction of the top marginal corporate income tax rate from 35 percent to 21 percent. Additionally, the imposition of 2.3 percent medical device excise tax, a leftover from Obamacare, was delayed to the end of 2019. Unfortunately, the 3.8 percent NIIT — Net Investment Income Tax, also from Obamacare, was not repealed. Historical data support the effectiveness of permanent tax cuts as a powerful economic stimulus. The test of Trump’s success is simple: Will the real GDP growth rate in 2018 be equal to or exceed three percent? In addition, the unemployment rate already dropped from 4.8 percent in January 2017 to 3.8 percent in May 2018. At 3.8 percent, the unemployment rate is now as low as it has been since April 2000.
Last, but not least, unfortunately, President Trump recently imposed tariffs on steel and aluminum. While these tariffs are good for the employees and stock holders of the steel and aluminum industries, even without “trade wars” — which are unlikely — they are bad for many other industries in the United States, for example automobile makers.
I am optimistic President Trump’s corporate and income tax cuts — the Tax Cuts and Jobs Act of 2017 — will stimulate the economy to grow at least at a rate of three percent. But I am concerned about the new tariffs. The sooner the president abolishes the tariffs the better.