One of the great economic puzzles of the last decade is why growth since the last recession has been so weak. Last week, President Donald Trump’s economic team pointed the finger at President Barack Obama.
There’s a tradeoff between growth and fairness, and Mr. Obama erred too far in favor of the latter, argued Mr. Trump’s Council of Economic Advisers its first Economic Report of the President.
Mr. Obama’s “efforts to strike a new optimum on the frontier of social protection and economic growth may have sacrificed too much of the latter in pursuit of the former,” the report declares. The typical household earned less in 2016 than in 2001 and “Obama’s tax and transfer policies worsened the wound,” Kevin Hassett, the council’s chairman, told reporters.
Mr. Hassett probably has the direction right: Mr. Obama raised marginal tax rates, inundated business with rules and lawsuits and expanded “means-tested” benefits (i.e., that phase out as incomes rise). Textbook economics predicts all these things ought to discourage work and investment. But his report does not prove these policies explain the magnitude of the growth shortfall, and is silent on the harm some of Mr. Trump’s own policies could do, in particular restricting legal immigration.
Economic growth since the trough of the recession in 2009 has been the weakest of any expansion since 1949. But an aging population means the economy can’t grow as fast as it used to. Moreover, financial crises usually beget weak expansions and the U.S. actually did better than all but one of the seven largest advanced economies.
Mr. Obama’s macroeconomic policies—those aimed at the economy as a whole—were relatively mainstream and made the recovery faster than otherwise: fiscal stimulus, bailouts of tottering financial companies and car manufacturers, and support for the Federal Reserve’s aggressive monetary easing.
There’s a case, though, that his microeconomic policies, which aim at specific industries or groups of people, did hurt, especially during Mr. Obama’s second term. By then, postcrisis trauma was a less convincing explanation for slow growth. Financial companies faced a blizzard of laws, rules and lawsuits that likely crimped the supply of credit. Oversight of energy, the environment, higher education and health care expanded dramatically.
Proof that this moved the needle on growth is elusive. Until last year, capital spending and productivity growth were tepid, but they were abroad as well, including in Britain with its far less interventionist government. Mr. Trump’s first year has witnessed a significant rollback of regulations. Yet in a recent report, Goldman economists found hiring, capital spending and stock prices of industries most likely to benefit have not outperformed, outside of finance.
Mr. Hassett’s team is on firmer ground when it fingers taxes and transfers for holding down the supply of labor. The share of working-age people working or looking for work has plummeted since 2008, and only part of this is because baby boomers are retiring. Labor-force participation didn’t fall as much, if at all, in other countries, which suggests U.S.-specific factors are at work.
Mr. Obama imposed new Medicare taxes on affluent households’ wages and investment income and boosted the top marginal tax rate. He introduced means-tested health-insurance subsidies, expanded Medicaid, loosened work requirements for welfare and food stamps, and repeatedly extended unemployment-insurance benefits, all of which made work less attractive. He introduced income-contingent student loans, which is “just a tax on work — make more, have to repay more,” notes Douglas Holtz-Eakin, president of the conservative American Action Forum, a conservative think tank.
The report cites the University of Chicago’s Casey Mulligan, who has argued more generous transfers aggravated the recession by making it easier for some people to turn down jobs. But it acknowledges other economists have challenged Mr. Mulligan’s conclusions. The report cites several other factors for discouraging labor supply, such as disability insurance and opioid addiction. But Mr. Obama had nothing to do with these.
Mr. Trump has proposed getting more people into the work force by combating opioid addiction, boosting apprenticeships, and adding paid maternity leave. He is also proposing work requirements for Medicaid, and floated changes to disability. These could slow the demographics-driven fall in labor supply.
Yet he also seeks to cut family-based and other non-employment-based immigration, by more than 400,000 per year, according to the libertarian Cato Institute, which opposes the plan.
If skilled immigrants took their place, that would be a plus for growth. But that’s not what Mr. Trump proposes. In fact, he’s raising hurdles to temporary skilled workers. With the native-born working-age population set to contract, slashing immigration would severely dent potential growth, offsetting much of the boost reduced taxes and regulations are supposed to deliver.
This is not seriously disputed by economists. Still, immigration rates just two passing mentions in the Economic Report of the President—both negative.
RELATED
Trump Economic Report Blames Obama Policies for Slow Growth (Feb. 21)
The Myth of Trump’s Do-Nothing Presidency (July 26, 2017)
Trump’s Hard Line on Immigration Collides With U.S. Demographics (Feb. 22, 2017)
from Real Time Economics http://ift.tt/2ouVAEm
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