By Kevin A. Hassett
Monday, December 21, 2020
Dr. Tyler Beck Goodspeed is Acting Chairman of the White
House Council of Economic Advisers. He discussed the Trump administration’s
economic response to the COVID-19 pandemic with Kevin Hassett, senior adviser
to National Review’s Capital Matters. The interview is edited for
clarity and brevity.
1) The Trump administration has pursued an ambitious
economic-policy agenda to try to grow the U.S. economy, but the media doesn’t
often cover his successes. What do you think is the least known aspect of the
Trump administration’s economic record?
One of the most striking economic results of the first
three years of the Trump administration was the remarkable decline in wage,
income, and wealth inequality, marking a complete reversal from the preceding
eight years. Whereas during most of the expansion through 2016, we observed
widening wage, income, and wealth inequality, in the first three years of the
Trump administration — and particularly following historic tax reform in 2017 —
we observed substantial declines in all three.
During the first three years of the Trump administration,
real wage growth at the 10th percentile (+9.8 percent) was more than double
real wage growth at the 90th percentile (+4.8 percent). Since the 2017 Tax Cuts and Jobs Act, real
wealth for the bottom 50 percent of the distribution rose 28.4 percent, while
that of the top 1 percent rose 8.9 percent, with the bottom 50 percent’s share
of real wealth rising while that of the top 1 percent declined. The labor share
of income rose, while that of capital declined. In one year (2019) real median
household income rose by more (+$4,400) than in the entire 16 years through
2016 combined.
What’s especially interesting from an academic
perspective is that the distribution of the aggregate economic gains from the
Trump administration’s pro-growth agenda is entirely consistent with a growing
body of empirical literature that reveals that the economic burden of high
effective tax rates on capital and an increased regulatory burden are in fact
disproportionately borne by labor. It
was on the basis of this literature that in 2017, the Council of Economic
Advisers projected that the business-tax changes in TCJA would raise household
incomes by $4,000. By the end of 2019,
real median household income was already $6,000 higher than it was in 2016.
2) How do you respond when someone asserts that the
strength of the Trump economy is just an extension or spillover from Obama’s
economic policies?
I think there are two ways by which this claim is
disproven. The first is by looking at
trends in growth rates. Economic growth is typically faster at the beginning of
expansions, which is why, historically, the amplitude of an expansion is
strongly correlated with the amplitude of the preceding contraction. But when
we estimate trends in growth rates for a variety of macroeconomic indicators
during the Obama expansion and project those trends into 2017, 2018, and 2019,
we observe large residuals, indicating that growth during the first three years
of the Trump administration exceeded the trend. In many instances, this is
confirmed by statistically testing for slope changes.
The second, more straightforward approach is to simply
look at outcomes relative to expectations. For example, in the three years
before the pandemic, the U.S. economy added 7 million jobs — 5 million more
than projected by the nonpartisan Congressional Budget Office in August 2016.
In the first two months of 2020 alone, the U.S. economy added more jobs
(+465,000) than the CBO projected would be created in the entire 12 months of
2020. GDP was roughly $300 billion (or
1.2 percent) larger than the CBO had projected, while the unemployment rate was
1.4 percentage points lower. Whether you’re
a Keynesian or a supply-sider, I think this substantial outperformance is clear
evidence of a shift, and there are specific, major policy changes we can point
to that we would expect to have generated such a shift.
3) There’s a lot of pushback on the idea that this
pandemic-induced recession is comparable to ones in the past since it didn’t
come from something more systemic. Is it really fair to compare this crisis to
the financial crisis of 2008-09?
It is certainly true that in contrast to 2008-09, the
pandemic recession was the result of a purely exogenous shock. But I think it’s also worth noting that the
severity of the adverse economic shock that hit us in 2020 as a result of the
pandemic is several orders of magnitude greater than that of 2008-09, or any
macroeconomic shock to the U.S. economy in nearly a century. In the spring, the
Organization for Economic Co-operation and Development was predicting that the
U.S. economy would decline by 12.3 percent in 2020. Whether the source of the shock is endogenous
or exogenous is to a certain extent missing the point — a hit that massive
would be catastrophic.
So one of the things we learned from the slow recovery
after 2008-09 was the importance of preserving quality matches between
employers and employees. That’s why we responded with provisions like the
Paycheck Protection Program and an employee-retention tax credit — measures
designed to help firms maintain payrolls and employee connections during the
pandemic crisis in order to set the U.S. economy up for a faster labor-market
recovery. And I think it’s that policy
response, as well as the elevated labor-force attachment of the pre–COVID-19
Trump economy, that is why we observed the broadest measure of labor underutilization
(U-6) declining rapidly from a peak of 22.8 percent in 2020, to 12.0 percent in
November — lower than the level prevailing in July 2014, more than five years
into the preceding recovery. But serious
pandemic risks remain, which is why the administration continues to call for
further economic support.
4) The president often talks about the “plague from
China.” We all know that he’s been tough on China in the past with his
controversial tariffs, but as we see the trade deficit widening, and China
having a quick economic recovery following their lockdown earlier this year,
how do we know the president’s economic policies toward China have been
effective?
Well, firstly, I think it’s important to point out that
since the Section 301 tariffs went into effect starting in July 2018, we have
observed a decline in the bilateral trade deficit between the U.S. and China,
from $88.7 billion ($354.8 at an annualized rate, or 1.7 percent of GDP) to
$68.1 billion ($272.4 billion at an annualized rate, or 1.3 percent of GDP) at
the end of 2019. The bilateral trade deficit has increased slightly during the
COVID-19 pandemic, particularly as international trade in goods has recovered
faster than international trade in services, but remains below pre-Section 301
levels.
More important, though, from my perspective, is that
during the first three years of the Trump administration, the U.S. economy
added 500,000 manufacturing jobs and nearly 12,000 new factories. This is a
stark contrast to the period from the establishment of Permanent Normal Trade
Relations with China through the end of 2016 as roughly 4.6 million
manufacturing jobs were lost in the face of increasing import competition from
a multi-trillion-dollar non-market economy.
While we have a lot of work left to do to fully recover from the
pandemic recession, as of November 2020 we had regained almost 60 percent of
the manufacturing jobs lost in the horrific months of March and April.
In addition, the Phase I agreement we negotiated earlier
this year requires structural reforms and other changes to China’s economic and
trade systems in the areas of intellectual property, technology transfer,
agriculture, financial services, and currency and foreign exchange, along with
tough monitoring provisions that provide safeguards against past unfair trade
practices on the part of the People’s Republic of China.
5) Even with the strength of the labor market recovery
we’ve seen so far, there’s often talk that it’s been a ‘K-shaped’ recovery,
with diverging outcomes for those at the upper end of the income distribution
relative to those at the bottom. How do you respond to that?
One aspect of the pandemic recession that I don’t think
gets sufficient attention is the extreme regressivity of lockdowns and
associated job losses, which have been disproportionately concentrated among
lower-wage, predominantly service industries. Even if enhanced unemployment
insurance benefits and economic-impact payments were able to make some of those
individuals financially whole in the near term, there are human-capital
deficits incurred from loss of on-the-job training and skills acquisition, and
those deficits can compound over time.
This is why in designing the CARES Act, the Trump
administration focused very hard on trying to surge fiscal support to the most
vulnerable households by targeting economic impact payments to lower- and
middle-income households, including those with no federal income-tax liability,
and providing temporary enhanced unemployment-insurance benefits of $600 per
week. As a result of this unprecedented
support, we actually observed monthly income at the 25th percentile rise in the
months following the CARES Act.
Longer term, the key to ensuring a balanced recovery will
be that we continue the rapid recovery of the U.S. labor market we observed
through November 2020. In the 7 months through November, the U.S. economy
regained nearly 6 of 10 jobs lost as a result of the pandemic. This is in stark
contrast to the weakest economic recovery on record during the Obama administration,
which took almost 3 years to achieve the same.
It took 6 years for the Obama administration to gain back all jobs lost
in the 2008-09 recession, compared to a postwar average of 2 years for a full
recovery. The sooner we return to the labor-market conditions that prevailed on
the eve of this pandemic, the sooner we’ll be observing the kinds gains across
the income distribution that we saw at the start of this year, which is why the
Trump administration has been pushing hard for additional measures to support
employee retention and hiring.
No comments:
Post a Comment