Trump 1.0 – a short account

During Trump's first presidency from January 2017 to January 2021, the US economy performed very well in terms of key macroeconomic indicators. Donald Trump attributed the strong economy to himself, claiming that he had inherited a “disaster” from President Barack Obama and had “accomplished an economic turnaround of historic proportions”.  But by the time he became president, the economy had already recovered from the Great Recession and had almost reached full strength.

Under Obama, the unemployment rate fell from a recession peak of 10% in October 2009 to 4.7% in January 2017, at the end of his second term. It has continued this positive trend under Trump and reached a 50-year low of 3.5% in September 2019 (Fig. 1). Employment growth was similarly positive. By the end of the Obama administration in January 2017, the economy had created jobs for 76 consecutive months. Under Trump, the streak was extended to 111 consecutive months. However, the average monthly job growth during Obama's second term was 215 thousand, while under Trump it was only 182 thousand until February 2019, i.e. excluding the coronavirus pandemic (Fig. 2).¹

No overperformance can be claimed for the growth of the US economy during Trump’s first presidency. Average real GDP growth was 2.3% during the second Obama administration and 2.5% under Trump, again excluding the pandemic period (Fig. 3).

There is also no evidence in the economic literature that the booming economy is due to Trump. Based on a counterfactual scenario comparing the performance of the US economy to that of a “doppelganger” – an algorithm-based combination of other economies that most closely resemble the pre-election economic situation in the US – Born et al. (2021)²  find little support for a Trump effect. After all, Trump's most notable economic policy – his tax cuts worth USD 1.9 trillion over ten years³ – did not take effect until a year after he took office. By January 2018, the labor market had created 2.3 million new jobs and the unemployment rate had fallen from 4.7% to 4.1%.

Likely the most visible stamp of Trump’s presidency is the instigation of the trade war with China and the deterioration of public finances. Tariffs on Chinese goods had the primary goal to reduce the US trade deficit and save the US economy from the damage of “China’s very abusive trade practices”. The goal remained broadly uncompleted. The trade balance with China improved during the pandemic but started deteriorating thereafter, driven by rising imports from China (Fig. 4). Regarding public finances, increasing tariff revenues did not bring any visible relief since general government deficit expanded from 5.6% of GDP in Q1 2017 to 7.1% shortly before the pandemic. Accordingly, public debt increased from 102% of GDP to 109% over the same period (Fig. 5).

Trump’s economic agenda 2.0

The selection of Senator Vance as the candidate for Vice President could have provided a little more clarity about the economic policy direction of a possible Trump administration. Vance is sometimes seen as belonging to the Republican wing, which favors the principles of the Reagan era – low taxes, low regulation and a free market economy.⁴ This seems broadly in line with Donald Trump's current ideas, which are summarized in Table 1.

He has not yet released a detailed tax plan as part of his current bid for re-election, but he has unfolded some tax policy ideas. Among other – sometimes blurred ideas – he would seek to extend the expiring measures of the Tax Cuts and Jobs Act (TCJA) of 2017 and further reduce the corporate tax rate.⁵ The latter would decrease from 21% to 20% in general and to 15% for companies that produce in the US.⁶ Several provisions of the TCJA could have some positive impact on the economy, most notably by incentivizing labor force participation (via low marginal tax rates and a simplified tax return) and supporting business activity and investment incentives (via the reformed business taxes). However, most of these growth effects were already achieved with the original reform. The marginal effect of the extension is therefore likely to be small. Should the extension of the TCJA boost the economy, this could lead to additional upward pressure on prices and would necessitate a restrictive monetary policy by the Fed. At the same time, budget deficits would persist, and public debt grow further as it is unlikely that Trump would be able to deliver sufficient budgetary offsets. This in turn poses the greatest risk to the underlying scenario. An extension of the TCJA without offsets could be blocked in Congress, which is likely to call for more fiscally responsible tax policies.

Trump has expressed his dissatisfaction with the Fed quite clearly, claiming that “it’s sort of gotten it wrong a lot and [Powell] tending to be a little bit late on things. He gets a little bit too early and a little bit too late and, you know, that’s very largely a gut feeling (…)”.⁷ Exactly how this would manifest itself is uncertain, but investors fear that he wants to influence the Fed's interest rate decisions. However, the president's powers in this regard are limited by law. The Federal Reserve is an independent authority to ensures that monetary policy decisions are made on the basis of economic considerations rather than political influence. However, the president is authorized to appoint members to the seven-member Board of Governors of the Federal Reserve, including the chair and vice chair. Trump’s first chance to appoint a new governor will be in 2026, and he could also appoint a chair to replace Jerome Powell in January 2028. While the president can appoint individuals with certain economic policy views or preferences, governors' terms are staggered over 14 years, which should protect the Fed from short-term political pressure. In addition, these appointments must be confirmed by the Senate, which has blocked two of Trump's four nominees in the past.

Although the exact plans are still vague, Trump would continue his fight against immigrants in “the largest deportation operation in American history”.⁸ But the feasibility of such plans is low. Not only logistical but also legal hurdles to rounding up and deporting undocumented immigrants are likely to thwart the plans. Deportations would keep the government busy for years, and Democrat states may refuse to cooperate. Finally, lengthy lawsuits against such plans and the overturning of deportation orders by courts are likely.

However, the idea of “mass deportation” was called into question for economic reasons. As a reaction to 9/11, immigration laws were more strictly enforced, leading to a restriction on the entry of undocumented immigrants and a relative increase in the entry of highly skilled immigrants. This type of immigration is less likely to steal jobs and is more inclined to become entrepreneurs and create new jobs. There is also evidence that (less skilled) immigrants are filling jobs vacated by the native population, which has a positive offsetting effect given the current labor shortage and inflationary pressures. Instead, the decline in the inflow of immigrants to the US since 2016 has coincided with a tightening of the US labor market.⁹

One policy area where Trump is particularly euphoric, but which has also gained the most notoriety, especially abroad, is his trade policy agenda. It includes a universal baseline import tariff of 10% and 60% specifically on imports from China - Trump's nemesis on this front. Aside from the expected negative impact on GDP – the higher, the more retaliation from affected trading partners – import tariffs could have an impact on the US dollar. In the short term, the currency is likely to appreciate as foreign goods become more expensive and consumers and businesses would shift their demand more towards domestic goods. The intended reduction in the trade deficit – however uncertain this effect may be in light of past experience – could reduce the supply of US dollars on the foreign exchange markets and strengthen the external value of the currency. However, in the longer term and in the event of retaliatory measures or a full-blown trade war, US exports would be negatively impacted, which would reduce demand for the US dollar and weaken the currency. This effect would be exacerbated by additional inflationary pressure that could result from higher prices for imported and domestic goods. If this prompts the Fed to raise interest rates to combat inflation, it could have a negative impact on the economy and cause foreign investors to reduce their exposure to the US.

Trump's euphoria on the trade policy front is likely to ride the waves of powers he could use to implement his pledges. Although under normal circumstances the tariff imposition needs the approval in Congress, the president has some non-negligible powers under the trade laws. Under Section 232 of the Trade Expansion Act of 1962, national security emergency can be declared. The president can also invoke unfair trade practices under Section 301 of the Trade Act of 1974. Finally, he can claim injury to domestic industry under Section 201 of the same Trade Act. Straight from the beginning of his first presidency, Trump has not hesitated to circumvent Congress and used all three sections to introduce several significant tariff measures.¹⁰

Conclusions

As with many political programs, Trump's election promises offer some potential for both positive and negative economic stimulus. At the same time, legislation and regulations work out a powerful system of checks and balances which could play a moderating role in bringing about significant change. The effectiveness of policies under a potential Trump administration could be increased provided the Republican majority is won in both the House of Representatives and Senate, which is nevertheless unlikely to happen.¹¹

Most importantly, however, aside from his outspoken economic agenda, Donald Trump has often shown that he is capable of unorthodox policy moves and that his views are often erratic and mercurial, such as his encouragement of Russian attacks on “delinquent” NATO members and the claim to resolve the Russia-Ukraine conflict within 24 hours. This unpredictability could prove destabilizing and damaging to both the US economy and its relations with abroad. It has already led to non-negligible uncertainties in US relations with traditional allies such as Canada, the European Union and Japan. Looking ahead, an unpredictable Trump 2.0 could at best complicate bilateral relations with the US, and at worst require an entirely new approach.