The impact of Trump’s policies for average American households
In all the public furor the past 48 hours over President Trump’s comments that 4 members of Congress should go back where they came from, I thought it would be a good time to step back from the heated rhetoric and do a general policy check in. The goal is to get a grounded understanding of what President Trump has accomplished in his first 2+ years in office. I realize people could differ on what the major policies are, but I think it’s reasonable to focus on four big policy initiatives:
- Most significant legislation enacted: Tax Cuts and Jobs Act signed December 22, 2017
- Most significant executive action A: successive rounds of tariffs imposed on Chinese goods imported to the US
- Most significant executive action B: withdrawal from the “Joint Comprehensive Plan of Action” (aka, the Iran nuclear deal) on May 8, 2018
- Biggest policy focus: immigration, particularly illegal immigration and asylum seekers
Again, I’m sure others will have different lists but most people of all political stripes would say those are close to the right ones to focus on.
Tax Cuts and Jobs Act (TCJA)
As a quick refresher, the act made numerous changes to both individual tax rates and corporate tax rates. The changes for individual households were mixed, with most wealthy households receiving significant cuts but changes for middle class households varying depending on individual circumstances like whether filing married or jointly, state of residence, and number and type of deductions claimed. The corporate tax changes were also complex, but the most impactful portion was lowering the headline rate from 35% to 21%.
President Trump’s Secretary of Treasury Steve Mnuchin succinctly outlined the rationale for the tax cuts in an interview with CNBC. “So our tax plan was really designed to stimulate the economy and get growth,” Mnuchin said. “So we’re humming along on where projections are and as I’ve said at 3% economic growth this tax plan will not only pay for itself but in fact create additional revenue for the government.” Bundled in that are really two rationales: economic growth and federal budget deficit/surplus. So how have things turned out?
On economic growth, the ideal measure would be median household income. However, this is difficult to calculate, and our most recent data is 2017. However, a close second is looking at wage growth (blue line in the chart below) and the unemployment rate (orange line in the chart below) both of which have current data. The dotted line shows when the TCJA was enacted. Higher wage growth (blue line) is good and lower unemployment rate (orange line) is bad. As you can see, both numbers were awful in the Great Recession and have been improving since then. Furthermore, both have been moving in the “good” directions since the TCJA was passed. The unemployment rate has gone from 4.1% to 3.7%, and wage growth has grown from 2.9% to 3.9%. With that said, it’s unclear how much the TCJA led to these numbers. The decline in the unemployment rate, in particular, seems to be a continuation of a trend from the previous decade. But it’s always difficult, if not impossible, to really understand the impact of tax changes on the economy, so we’ll leave this with a qualified success.
Chart 1: US Nominal Wage Growth and Unemployment Rates
The other rationale for the TCJA was the impact on the federal budget. Here the results are clear and negative. The White House announced Monday that they are projecting the fiscal year 2019 (October 2018 to September 2019) to be $1 trillion. For comparison, the budget deficit for fiscal year 2017 (the year President Trump took office), the deficit was $665 billion. So in two years, the budget deficit has grown a jaw dropping 50%. As I wrote in a previous blog, this is particularly staggering because the economy is relatively strong. We’ve only experienced deficits this size when in the throes of the Great Recession.
On net? The TCJA likely had some positive impact on the economy, but this positive effect was more than offset by increases in the federal budget deficit, which will eventually need to be paid back.
Tariffs on Chinese goods
President Trump has long stated a desire to reduce the US trade deficit (where the value of US imports is greater than US exports), particularly with China. He has also repeated the belief that a trade war to reduce this deficit is easy to win, stating, “When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win… When we are down $100 billion with a certain country and they get cute, don’t trade anymore — we win big. It’s easy!”
However, the reality has been quite different. The Trump administration stated 6 broad goals when imposing tariffs on China:
1. End “forced technology transfer” policies that require US companies operating in China to share their technology with Chinese companies,
2. End policies that force American companies to operate as joint ventures with Chinese-owned companies in China,
3. Crack down on industrial espionage and theft against American firms,
4. End subsidies of domestic companies in strategic high-tech sectors,
5. Reduce barriers to American agricultural exports,
6. Reduce the trade deficit between the US and China.
More than a year since the trade war began, China has agreed to none of the points above. Furthermore, though still below its peak, the trade deficit with China has increased substantially as shown on the graph below. This is because exports have shrunk more than imports. For example, soybean sales to China decreased 15% from last year. There’s still a chance that China will blink, but for now, President Trump’s trade war is having the opposite effect he intended.
Chart 2: Monthly US/China Trade Deficit ($B), Seasonally Adjusted, 3-Month Moving Average
Withdrawal from the Iran nuclear agreement
President Trump made no secret of his opposition to the “Joint Comprehensive Plan of Action”, frequently calling it “the worst”. As a candidate, he also committed, “I’ll tell you that this deal, if I win, will be a totally different deal. This will be a totally different deal.” When he formally announced withdrawal from the JCPA in May 2018, Trump stated, “It is clear to me that we cannot prevent an Iranian nuclear bomb under the decaying and rotten structure of the current agreement. The Iranian deal is defective at its core. If we do nothing, we know exactly what will happen. In just a short period of time, the world’s leading state sponsor of terror will be on the cusp of acquiring the world’s most dangerous weapon.”
However, if the goal of President Trump’s policy has been to reduce Iranian progress toward nuclear weapons, the reverse has happened. In April 2018, when the Trump administration was weighing leaving the JPCA, then CIA Director (and now Secretary of State) Mike Pompeo told the Senate, “I’ve seen no evidence that they [Iran]are not in compliance today.” Last week, Iran announced that, because the US reneged on its commitments in the JPCA, it would exceed uranium enrichment limits it had previously agreed to.
Thus, the situation with Iran is similar to the situation with China. Iran may come back to the negotiating table and may make concessions, but it appears at this time that President Trump’s decision to leave the JPCA has accelerated Iran’s progress toward nuclear weapons — things are worse rather than better.
President Trump’s early immigration focus was illegal immigration, with two rationales. The first is economic. In the campaign, Trump stated, “Decades of record immigration have produced lower wages and higher unemployment for our citizens, especially for African-American and Latino workers.” In his inaugural address he reiterated, “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”
The second rational is based on crime. Throughout the campaign, Trump railed against illegal immigration: “I am very critical of illegal immigration and the tremendous problems including crime, which it causes,” “We are going to build a great border wall to stop illegal immigration, to stop the gangs and the violence, and to stop the drugs from pouring into our communities,” and “We have gangs roaming the street. And in many cases, they’re illegally here, illegal immigrants. And they have guns. And they shoot people.”
More recently, as the asylum backlog has grown, he’s added reducing legal asylum seekers to reducing illegal immigration. As he said in April, “I say, and this is our new statement, the system is full. We can’t take you anymore. Whether it is asylum or anything you want, illegal immigration, we can’t take you anymore. Our country is full.”
Assessing President Trump’s approach to immigration is hard because it’s hard to measure the illegal immigrant population, and there are no reliable estimates for changes since Trump took office. So we can’t determine if any of his policies have reduced immigration. But we can look at the policies he’s pursued would logically drive the goals he espoused — support for US workers and lower crime.
If President Trump really believes illegal immigrants are taking American jobs — and multiple studies have concluded that illegal immigration does drive down wages of native workers, particularly the unskilled — the sensible approach would be to force employers to verify the immigration status of employees and punish those who employed illegal immigrants. But Trump has not pushed this. In fact, the Trump business organization only began using the e-verify system in January this year, after reporters uncovered at least one of his golf courses continued to knowingly employ illegal immigrants. When there are already over 7 million illegal immigrants in the US workforce, building a border wall won’t do anything to help US workers.
Trump’s second rationale for limiting illegal immigration, crime reduction, is simply wrong. As the data from Texas below show, illegal immigrants commit crimes at lower rates than the native population.
Chart 3: Crime Rates by Population Group (Texas 2015 data, per 100,000 people)
We’ve looked at four major policy areas:
- Goal: economic growth and deficit reduction
- Actual outcome: modest uptick in economic growth and massive increase in the deficit
China trade war
- Goal: alter China’s trade policies and reduce bilateral trade deficit with China
- Actual outcome: no change in China’s trade policies and increase in trade deficit with China (due to reductions in farm imports)
Cancelling Iran nuclear agreement
- Goal: reduce Iran’s progress toward nuclear weapons
- Actual outcome: Iran now increasing uranium enrichment because it is no longer constrained by the agreement
- Goal: reduce immigration to improve US worker wages and reduce crime
- Actual outcome: unclear, but Trump has avoided pushing e-verify, which is the policy that would most clearly reduce illegal immigration and improve wages; crime goal is erroneously connected to immigration
Taken as a whole, it is a pretty grim report card. Over halfway through his first term, President Trump has achieved virtually none of the policy objectives he stated were important, and in most cases it is clear that the policies he has pursued are actually counterproductive or irrelevant to achieving those objectives.
I usually focus this blog only on policy, but I feel compelled to address the political context in a week where President Trump told four members of Congress to “go back…[to] the totally broken and crime infested places from which they came.” This remark is clearly racist since three of the four were born in the US and the fourth has been a citizen longer than Melania Trump. Challenged later on these remarks, he tweeted, “they hate our own Country.” Trump is not alone in articulating that sentiment. Tucker Carlson, Kayleigh McEnany, Rush Limbaugh, and Senator Lindsey Graham have all said progressives in general or the “squad” of Democratic Congresswomen in particular “hate America” or are otherwise “anti-American.”
Let’s be clear that these personalities have provided no evidence that the Congresswomen hate our country. The squad has clearly stated that they love this country, and Rep. Ilhan Omar who was born in war-torn Somalia stated, “I probably love this country more than anyone that is naturally born.” And just taking a step back — does it really make sense that someone who hates this country would put themselves through the torture of serving in Congress?
But despite that, this is now a Conservative narrative echoed by the President, his campaign staff, prominent Republican politicians, and conservative media personalities. It has understandably taken hold among conservative voters. And while those voters may not like Trump saying racist things, they’re more offended by people who hate America serving in Congress.
So whether Trump is actually racist and can’t control his tongue and Twitter finger or a strategic politician who says racists things to control the media cycle (and I’m really not sure which is worse), this is the debate dominating the media cycle. Two thirds of Americans are seeing a racist President because that’s what’s covered in their media, and one third of Americans are seeing a President fighting for Americans against people who hate America because that’s what’s covered in their media. None of the media is focusing on his policy record, which would have to be judged a failure based on Trump’s own stated goals.
If you step back and realize that the squad loves America, it becomes clear that Trump is not fighting for the average American household. He’s just fighting, not really fighting for anyone except maybe himself. And while we’re distracted by that fight, we’re missing the reality that President Trump is also not working for middle class Americans. His policies aren’t helping us, and they were never really designed to. Most of them are just other fights he has picked to keep the conflict-loving media cycle occupied.