In the past few days, there has been a lot of partisan back-and-forth about the state of the economy, and about who is responsible for its present condition. Speaking at the University of Illinois, on Friday, shortly after the Labor Department announced that employers created another two hundred and one thousand new jobs in August, former President Barack Obama reminded his audience that ‚Äúthe longest streak of job creation on record” began under his watch. Obama said, ‚ÄúLet‚Äôs just remember when this recovery started. I‚Äôm glad it‚Äôs continued. But when you hear about this economic miracle that‚Äôs going on ‚Ä¶ actually, those job numbers are the same as they were in 2015 and 2016.‚ÄĚ
What Obama said was accurate. During the final nineteen months of the Obama Administration, roughly four million jobs were created in the United States. In the first nineteen months of the Trump Administration, roughly 3.6 million jobs were created. Those are healthy figures so far into a cyclical upturn‚ÄĒthe economy has been growing since the summer of 2009‚ÄĒbut they represent a slight slowdown relative to 2013 and 2014. The fact is that economic growth was pretty modest during the first year of the Trump Administration: inflation-adjusted Gross Domestic Product, the broadest measure of the economy‚Äôs output, rose by 2.2 per cent.
On Monday, Kevin Hassett, the chairman of the Council of Economic Advisers, held a press briefing at the White House, and he didn‚Äôt mention any of these figures. Instead, he showed the assembled reporters a series of graphs illustrating various measures of small-business confidence, capital investment, and the employment-to-population ratio among prime-age workers, which all appeared to show an upward break in trend since the end of 2016. ‚ÄúI can guarantee you that economic historians will one hundred per cent accept that there was an inflexion point at the election of Donald Trump, and that a whole bunch of data items started heading north,‚ÄĚ Hassett said.
We‚Äôll have to wait for the historians‚Äô verdict, of course. But a strong argument can be made that the recent uptick in hiring and growth can be traced not to Trump‚Äôs election, as Hassett said, but to the start of this year. The reason is straightforward: this winter, Congress passed a substantial economic-stimulus package, and what we have seen in the past few months looks like a textbook case of a stimulus giving a short-term boost to an economy that still had some human and physical resources lying idle.
You may ask, ‚ÄúWhat stimulus package?‚ÄĚ It consisted of two parts: the Tax Cuts and Jobs Act of 2017, which Congress voted into law last December, and the Bipartisan Budget Act, which was passed in February. Not many news stories drew a connection between these two measures, which was understandable. The tax cut bill created a bitter partisan battle, while the budget measure obtained support from both parties. But, from an economic perspective, the measures complemented each other. The tax bill cut corporate and personal taxes, thus raising the spending power of businesses and households. The budget bill raised caps on discretionary-spending authority, for 2018 and 2019, which has led to more federal spending across the board.
Few have acknowledged the scale of the stimulus these measures introduced into the economy. (Vox‚Äôs Matt Yglesias is an exception.) According to a study by three economists at the Peterson Institute for International Economics, released earlier this year, the provisions of the tax bill alone were sufficient to raise the budget deficit by approximately two hundred billion dollars‚ÄĒabout one per cent of G.D.P.‚ÄĒin the 2018 calendar year. The Budget Act raised the deficit by another seventy billion dollars, or roughly 0.4 per cent of G.D.P. If you combine the two, the over-all figure comes to some two hundred and seventy billion dollars, or about 1.4 per cent of G.D.P.
By any measure, that‚Äôs a substantial stimulus‚ÄĒthat it wasn‚Äôt advertised as such is immaterial. Indeed, according to economists at Deutsche Bank Securities, it is the biggest stimulus that any Administration has introduced outside of a recession since the Second World War. Since the tax cuts were heavily slanted toward corporations and owners of so-called pass-through businesses, they were highly inequitable: the poorest sixty per cent of households enjoyed only very modest benefits. But a stimulus targeted at rich people is still a stimulus of sorts, and as long as the economy doesn‚Äôt run out of available workers‚ÄĒand recent evidence suggests it hasn‚Äôt‚ÄĒyou‚Äôd expect a package of this size to have an impact on spending and output.
That‚Äôs what we‚Äôve seen. In the three months from April to June, the annual rate of G.D.P. growth rose to 4.2 per cent, from 2.2 per cent in the previous quarter. And it looks like the economy remained pretty strong through the summer. Most Wall Street economists are expecting G.D.P. growth in the third quarter of the year to clock in at more than three per cent. The forecast from GDP now, an estimate published by the Federal Reserve Bank of Atlanta, stands at 3.8 per cent.
Meanwhile, the pace of hiring has picked up, from about a hundred and seventy-five thousand a month last year to more than two hundred thousand a month in 2018. That‚Äôs good news for workers, and so are the signs in the August employment report, which showed that wages are finally picking up a bit. (Average hourly earnings for employees on private payrolls rose at an annualized rate of 2.9 per cent‚ÄĒhardly startling, but higher than it was before.) These developments also vindicate those analysts who argued all along that there was a good deal of slack left in the labor market, and that the official unemployment rate wasn‚Äôt a good measure of that slack, because all the people who had dropped out of the workforce weren‚Äôt being officially counted as jobless.
But, as with any stimulus, there are two key issues to consider: How long will the pickup in growth last? And how will the stimulus be financed? Historically, growth often sputters when a stimulus gets withdrawn. In his presentation on Monday, Hassett argued that the current growth spurt could be more enduring, because capital spending by businesses is rising sharply, meaning that ‚Äúpeople have better machines to work with and their productivity is going up. That means the recovery can last longer.‚ÄĚ
It is true that capital spending has picked up in the past year, or so, particularly on technology products and energy-related equipment. (The latter phenomenon has more to do with rising oil prices than with the stimulus.) But by this time next year the impact of the stimulus will be starting to run down, and it‚Äôs far from clear that the higher levels of capital investment will persist.
One thing that will definitely persist, however, is the higher level of debt issuance that the U.S. Treasury is being forced to undertake to pay for the stimulus. For every dollar added to the budget deficit, the Treasury has to sell another dollar of Treasury bonds. On Monday, the Congressional Budget Office reported that, as a result of higher spending and lower tax revenues, particularly from corporations, the deficit has risen by thirty-three per cent‚ÄĒto $895 billion‚ÄĒin the first eleven months of the current fiscal year, which ends on September 30th. This is only the beginning. The C.B.O. sees trillion-dollar deficits stretching into the indefinite future. Wall Street analysts reckon that by the end of 2019 the monthly issuance of Treasury bonds will have roughly doubled since the beginning of the Trump Administration.
So far, the Treasury hasn‚Äôt encountered much difficulty in selling its debt offerings at a low interest rate, but this could change. Torsten Slok, the chief international economist at Deutsche Bank, told me that he is already hearing concerns about sustainability from purchasers of Treasury bonds, particularly overseas buyers, such as insurance companies, pension funds, and sovereign-wealth funds. ‚ÄúThe fact that I am getting these types of questions is revealing that people are getting worried about the U.S. fiscal situation,‚ÄĚ Slok said. ‚ÄúThings look relatively benign now, but don‚Äôt take that a sign everything is great. There are a lot of worries around the world.‚ÄĚ The White House argues that faster growth will help pay for the deficit, but Slok dismissed that argument out of hand. ‚ÄúThe fiscal expansion is just way too big, and the additional debt is just way too big, to have any realistic growth trajectory to pay for it,‚ÄĚ he said. ‚ÄúWhen you get to 2020, you get to payback the positive impacts will begin to fade.
That isn‚Äôt what the White House wants to hear, of course. But it‚Äôs worth keeping in mind the next time you hear a Trump Administration official boasting about the state of the economy.