The Trump administration was ruining the pre-COVID-19 economy too, just more slowly

Key takeaways:

  • Long before the COVID-19 pandemic the Trump administration was squandering the pockets of strength in the American economy it had inherited.
  • Broad-based prosperity requires strength on the supply, demand, and distributive sides of the economy, and Trump administration policies were either weak or outright damaging on these fronts.
    • Demand: Most of the Trump tax cuts went to already-rich corporations and households, who tend to save rather than spend most of any extra dollar they’re given.
    • Supply: Business investment plummeted under the Trump administration, despite their lavishing tax cuts on corporate business.
    • Distribution: The Trump administration undercut labor standards and rules that can buttress workers’ bargaining power.

You don’t have to be an economist to know how the U.S. economy is doing today: It’s an utter shambles, with tens of millions of workers unable to find the work they need to get by, and with tens of millions of families facing extreme hardship and anxiety. These terrible conditions are mostly the result of the failure to manage and contain the COVID-19 outbreak, and the failure to appropriately respond in the economic policymaking realm.

President Trump, however, clearly wants voters to see the COVID-19 outbreak and fallout as nobody’s fault, and further wants to be graded on how the economy was doing pre-COVID-19. This is obviously absurd; the administration didn’t cause COVID-19, but it is responsible for the botched response to it.

Even besides this, however, it is far from clear that the pre-COVID-19 U.S. economy was evidence of good management or policy, a fact that voters seem increasingly aware of. In fact, Trump administration policies were squandering the pockets of strength in the U.S. economy that they inherited from their predecessors by using them to disguise the rapid erosion their policies were causing to U.S. families’ economic security.

This might seem like an odd claim, given that the stock market grew sharply before the COVID-19 shock, and that the unemployment rate sat at 3.5% at the beginning of 2020. But the stock market is a mostly meaningless indicator of economic security for the vast majority of Americans. The bottom 90% of households, for example, hold just 12% of corporate equities (directly or indirectly). Low unemployment, conversely, is a useful signal of broad-based economic health, but low unemployment is only a necessary condition, not a sufficient one, to declare an economy is working well for typical families.

An economy’s overall health, and how well it is serving its basic function of improving human happiness, is mostly a function of three facets: supply, demand, and distribution.

The economy’s supply side is its underlying productive capacity: how much income it could produce if all available labor and capital were fully utilized. This should grow over time as the workforce and the capital stock get bigger and more efficient, and this hopefully translates into broad-based income growth over time.

The economy’s demand side is the desired spending of households, businesses, and governments. These spending demands provide the spur to employers to hire people and to make sure that the economy’s potential capacity is put into use and generates actual income for people.

The economy’s distributive side is the set of institutions and policies that give (at least some) workers leverage and bargaining power to claim a fair share of overall income growth. Collective bargaining is historically the most important such institution.

These three facets of the economy’s health—demand, supply, and distribution—obviously interact. When demand is strong, employers are spurred to hire, which in turn makes available workers scarcer and provides them some leverage to achieve wage gains, affecting distribution. When demand is weak, the resulting glut of workers and depressed wage demands saps the incentive of firms to invest in labor-saving technologies and so growth in the supply side suffers. When distributive policy leads to concentration of income at the top of the distribution, where households save more than they spend of any additional dollar, demand predictably suffers. In short, an economy that reliably delivers the goods to typical families has to be working well in all three areas.

What has the Trump administration done to strengthen these three facets of economic health? Almost nothing, but it has often undermined them.

The strongest facet of the U.S. economy pre-COVID-19 was demand—spending was strong enough to keep employers robustly hiring and to drive unemployment to its lowest level in decades. Yet Trump administration policies had very little to do with this. The Federal Reserve was unusually supportive of this strong demand growth, and a bipartisan congressional deal in 2018 finally relieved some of the fiscal austerity that had constrained growth before. The main contribution from the Trump administration was their 2017 tax cut, which was extraordinarily inefficient in spurring demand growth, given just how much it cost in terms of fiscal resources. The reason for this inefficiency was obvious: The lion’s share of the tax cut went to already-rich corporations and households, who tend to save rather than spend most of any extra dollar they’re given.

On the supply side, the Trump administration would claim that this same tax cut boosted incentives for firms to invest in the economy’s capital stock. The data show pretty conclusively that this is wrong—business investment was absolutely plummeting well before COVID-19 had even appeared in China, let alone the United States.

On the distributive side, the administration was extraordinarily active in cramming through regulations and rules that undercut typical workers’ leverage and bargaining power. For decades, policy efforts to undercut workers’ bargaining power had redistributed trillions of dollars upward, and made workers dependent on ever-lower levels of unemployment just to see any wage increases at all. Trump administration policies put this into overdrive.

This distributive assault might explain an odd finding in the data on household income that has characterized the Trump administration: Measured correctly, income growth during the Trump administration has been slower than it was for the second Obama administration, even with unemployment lower in the more-recent years. Between 2013 and 2016, income growth averaged 2.6% per year, but in the first three years of the Trump administration, it has averaged just 2.1%. Besides unemployment being slightly lower in the Trump administration, productivity growth has also been slightly more rapid (as employers responded to tightening labor markets by trying to economize on labor costs), and yet median household income still has grown more slowly in the Trump administration.

This poor income growth during the Trump administration could be a statistical fluke. But it’s also exactly what one would expect from an incompetent economic manager squandering the pockets of strength it inherited from its predecessors. We should all realize now that the economic shock of COVID-19 didn’t just cause economic damage; it also exposed the damage that had been done for decades—and accelerated by the Trump administration—by policymakers who had undermined typical U.S. families’ access to economic security.