November 29, 2020

Paper Stones – Trump’s Economic Miracle: A Myth


Joe Biden has finally won the election. Against all odds, Donald Trump has been close to prevailing in the elections with a speech focused on his economic management, although the data (reality) do not support it. Is his legacy really such? Is right?

The growth trend in the United States

Some claim that Trump has achieved a true miracle in terms of economic growth and unemployment, achieving historically low rates of both variables. However, what is true about this assumption?

As can be seen in the following graph, the evolution of the growth rate of the United States in the first years of Donald Trump’s mandate is not very different from its evolution in the last three years with Obama as president, and is part of a trend inherited from its predecessor. The average of both groups is 2.5% and 2.3% respectively, with a growth of 5.5% in 2014.

What about unemployment? While it is true that the unemployment rate in February 2020 was 3.5%, the lowest in 50 years, during Trump’s last three years in the White House before the outbreak of the pandemic, 6.4 million jobs were created, compared to 7 million in the last 3 years of Obama’s term.

Trump’s protectionism

Another of the star points of the US president is the application of high tariffs to imports from several countries, China standing out among them. Some insist on the application of more tariffs, arguing that the US must have some self-sufficiency to reduce its dependence on third countries, while defending that this type of measures increase local employment. What’s true in this affirmation?

Nothing. In a recent study, the Federal Reserve investigates the effect of tariffs on the United States manufacturing sector and that of retaliatory tariffs on employment and prices borne by producers. Its results are clear: this type of protectionism has increased production costs and is responsible for a 1.4% decrease in employment in the manufacturing sector, that is, far from “returning” to Americans the jobs lost by offshoring in the sector, which has helped them benefit from lower prices, has reduced their employment.

Protectionism has also increased the prices of final goods and reduced the votes for the Republican Party, as already published by a server in Free market.

The tax reform

Other of the main measures of President Trump has been his great tax reform, which reduced, among others, the Corporation Tax from the range 15-35% depending on the company to 21% for all. While studies like that of Kumar (2019) claim that each point of GDP of lower taxes due to Trump’s tax reform translated into a 0.3% higher job creation, the reform has created a hole in US revenue, with corporate revenue being 80,000 million dollars less than expected when carrying out the reform and 230,000 million compared to the projections prior to the reform in both 2018 and 2019.

Employment in the US and COVID-19

As far as the economy is concerned, if there has been a protagonist of this crisis in the United States, that has undoubtedly been unemployment. Unemployment was falling in the United States when the COVID-19 crisis broke out, which totally reversed this trend, causing the United States to reach an unemployment rate greater than 14% that is now beginning to fall, with an uncertain future. Faced with this scenario, Congress decided to extend unemployment benefits in such a way that they exceeded 90% of the median salary of all states in the country. So much so that one out of every five unemployed who received these benefits managed to earn double or more than they earned in their respective jobs. However, although Democrats want to extend these extra benefits until at least January, Republicans are struggling to reduce it, something that can be fatal in a recession, as it reduces one of the mechanisms by which aggregate demand is being sustained, which affects turn to employment.

There is much talk about the supposedly spectacular figures for the US economy, but the data does not support such a hypothesis. The North American economy has remained, in both growth and employment, in the trend inherited from Obama, and Donald Trump’s protectionism has reduced employment in the United States while increasing the prices of goods that consumers buy Americans. In addition, when trying to reduce unemployment benefits, key in this serious recession, one of the mechanisms by which aggregate demand is maintained is being attacked.

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