NDN Blog

Trump’s European Tariffs Would Weaken The US Economy And The Transatlantic Alliance

This is the ninth article in a series produced by NDN challenging Trump’s tariffs.

On Friday, Nancy Pelosi will head to the Munich Security Conference with dozens of Congressional Democrats to reaffirm America’s security and economic commitments to our European allies. Since the end of the Second World War, the transatlantic alliance has played a critical role in defending liberal democratic values and ensuring widespread economic prosperity throughout the West, particularly in the United States. Today, over 7,000 European troops serve alongside American soldiers in Afghanistan, and exports to the EU support over 2 million jobs in the United States each year. While the Democrats reiterate America’s support for this critical alliance this weekend, however, Donald Trump will be preparing to drive a stake into its very foundations. On February 17th, the Department of Commerce will release their report on the national security implications of auto imports from the EU, which will almost certainly rubber stamp Trump’s claims that the EU is taking advantage of the US on trade. Following the report’s release, Trump will have 90 days to impose tariffs on EU auto imports as leverage to negotiate a trade deal, something that Sen. Grassley said Trump “is inclined to do” in an interview last month. Such a move would be devastating to the transatlantic system both economically and geopolitically, and Congress must decisively challenge such a decision.  

The imposition of auto tariffs of 25% on $65 billion worth of imports from the EU would be devastating to the US economy. First, the move would certainly lead to a trade war with the Europeans, and EU Trade Commissioner Cecilia Malmstrom already said last week that any tariffs on European auto exports would be met with reciprocal tariffs on tens of billions of dollars worth of American auto, agricultural, and industrial exports. As a result, auto production would fall significantly in the United States as exports fell, causing an estimated loss of over 700,000 jobs in the industry and a reduction in US GDP of $62 billion. This is on top of billions of dollars of lost earnings reported by Ford and GM as a result of Trump’s already imposed steel and aluminum tariffs, and would likely lead to negative earnings for the major American automakers in 2019. Second, the US tariffs act as a de facto tax on all American consumers. European-made cars would immediately skyrocket in price, but European-made auto parts are an integral part of American automakers’ supply chains, meaning that the price of US-made cars would also increase. The Center for Automotive Research estimates that the average price of a car would increase by $3,500 as a result of the tariffs. Not only would price increases reduce the disposable income of Americans, they would also reduce the number of overall cars sold per year in the US, causing significant job losses in the auto transport and dealership industries. Indeed, LMC Automotive estimates that the tariffs could cause US auto sales to fall by 2 million vehicles per year. The car sales industry employs over 1 million Americans, and a major slowdown in sales would lead to large employment losses there. What effect would a trade war over auto tariffs have on the US then? Tens of thousands of lost manufacturing jobs, and a big reduction in the disposable income of American workers.

Even worse, the auto tariffs could be the decisive blow that sends an already weak Eurozone economy into recession, something that could spark a global recession given already weakened global growth as a result of the US-China trade war. Over the past six months, growth in the euro area has weakened significantly as a result of global trade tensions, Brexit uncertainty, and fiscal issues in Italy. Last week, the European Commission slashed its growth projection for the Eurozone in 2019 from 1.9% to 1.3%, and Germany, the bloc’s largest economy, only narrowly avoided a technical recession in Q4 2018 while Italy, the bloc’s third largest economy, entered a recession last quarter. The imposition of auto tariffs by Europe’s most important trading partner would likely tip the weakened euro area into recession. Germany is by far the largest driver of growth in the bloc, and auto exports alone account for 5% of German GDP. Considering that German GDP growth was actually negative in the second half of 2018, a major shock to its most important industry would reverberate throughout its entire economy. Indeed, Barclays estimates that a 25% tariff on auto imports could lead to a 0.4 percentage point reduction in euro area growth in 2019. The result of a Eurozone recession would be very negative for the global economy, already in the midst of a slowdown from US-China trade tensions. The euro area is the 3rd largest source of global demand after the US and China, so a major slowdown there would lead to further weakness in global exports, and potentially a global recession.

Outside of the significant economic consequences of a trade war with the EU, such a move by Trump could tear the biggest hole in the transatlantic alliance since the end of the Second World War. America’s standing in the eyes of Europeans has already fallen enormously during the Trump administration, with “confidence in the US President to do the right thing regarding global affairs” falling by 75 percentage points in Germany, 70 in France, and 57 in the UK. Furthermore, Trump has consistently attacked the European Union as an entity (both in his support for Brexit and his support for far-right German parties opposed to Merkel) and has supported authoritarian, anti-Semitic regimes in Poland and Hungary even while the EU has attempted to sanction them. A unilateral American attack on the economy of the EU, however, would be a step beyond all of these actions, striking at the core quality of life of European citizens. The move would demonstrate that the United States under Trump fundamentally doesn’t care about Europe and the transatlantic alliance, and that Congress is either unable or unwilling to stop Trump from causing material harm to the EU. Further, the trade war is all the more harmful to EU-US relations because it is so clearly based upon fantasies created by Trump and his trade advisor Peter Navarro. Rather than taking advantage of the US on trade issues, the EU actually has a lower average tariff rate than the US according to the World Bank (2.35% in the EU vs. 3.36% in the US), and there have been no allegations of EU dumping or industrial subsidies regarding its auto exports as have been the case with China with furniture or solar panels for example. Trump is willing to significantly harm the EU’s economy to fix a make-believe trade problem that even his hawkish trade representative Robert Lighthizer says is a distraction from the real problem of China. With this in mind, the EU is likely to rethink their relationship with the US, and adopt a more “go-it-alone” strategy as has already started to become the case.

A new imposition of auto tariffs on the EU would likely devastate the US auto industry, cause a recession in the euro area and inflame the global growth slowdown, and significantly widen the growing schism in the transatlantic alliance. And what is Trump likely to get in return for such a move? Likely very little. Trump has justified the tariffs as needed leverage in future trade talks with the EU. However, the EU has clearly stated that they are not interested in a broad trade deal, and especially not one that includes agriculture. Furthermore, they have a strong incentive to not give in if Trump imposes auto tariffs, even if there is significant economic hardship: such a move would only encourage Trump to hold the EU’s economy hostage in the future for other negotiations, and being seen as subservient to Trump, the most unpopular US President in generations in Europe, would be politically disastrous for European leaders. Furthermore, as we saw in the Canada-EU trade negotiations that were almost derailed by half of the Belgian government over agricultural regulations and the failed TTIP negotiations, negotiating a trade deal with the EU involves harsh sacrifices by both sides that can fall apart at even the slightest hint of trouble, let alone a significant attack on the EU’s economy. And so the EU negotiations are likely to go about as well as the China negotiations – little progress made while the global and American economies suffer. But this time, the global economy starts from a much weaker position than it did in June 2018, and the Europeans are our critical allies, not our strategic rivals like China. In the face of these risks to global economic prosperity and the essential alliances that have created 70 years of peace and prosperity in the West, Congress must act to challenge this looming trade war and reaffirm our essential relationship with Europe. Doing so at Munich this weekend would be a great way to start.

The Trump Economy Is Not Working For Average Americans

At his State of the Union address this evening, Trump is likely to make grandiose claims about the state of the American economy. In just the past few months, he has claimed that the economy today is better than it has ever been, and that he has accomplished more in his first two years than any President ever. However, these claims are transparently false, and indeed, the economic performance of the US economy over Trump’s first two years has not even been better than that of Obama’s last two years, much less all of American history.

First, jobs growth. Although January’s payrolls report showing 304,000 new jobs was undoubtedly strong, we can’t let this cloud the fact that jobs growth has slowed under Trump (and indeed, monthly job growth was 300k or higher 4 separate times in 2015-16, compared to only twice in 2017-19). During the last 25 months of Obama’s second term, monthly jobs growth averaged 213,000. In the first 25 months of Trump’s term, meanwhile, it has slowed to 205,000 jobs per month.

Second, real wage growth. During the first 24 months of Trump’s term, real hourly wages have increased at a monthly average (annualized) of 0.9%. By contrast, real wages increased at a monthly average (annualized) of 1.35% during the last 24 months of Obama’s term.

Furthermore, median household income (which includes both private income and government taxes/transfers) grew by 1.76% in Trump’s first year, compared to growth of 5.15% and 3.13% in 2015 and 2016 under Obama.

Third, the deficit. When the economy is near full employment, traditional Keynesian economics would prescribe a reduction in the deficit, to provide the fiscal room for stimulus in the future. As a result, the deficit as a % of GDP fell under Obama from 9.8% of GDP in 2009 to 3.1% in 2016. Trump has reversed this trend, increasing the deficit from 3.1% of GDP in 2016 to 3.9% in 2018, and a projected 4.2% in 2019. Deficits this large while the economy is strong are unprecedented in US history. Trump’s budget deficits of 3.4%, 3.9%, and 4.2% in 2017, 2018, and 2019 will be the largest deficits while the unemployment rate is under 6% since 1950.

Fourth, the trade deficit. Perhaps Trump’s most signature promise was to end the so-called “foreign theft of American wealth” that he thought the trade deficit represented. Regardless of the lunacy of such thoughts, how successful has the President been in reducing the trade deficit? In fact, Trump’s policies have led to a surge in the trade deficit, as growth in imports has increased significantly while US exports have struggled. In June-October 2018, the average monthly trade deficit was 28% larger than during Obama’s second term.

Finally, access to health insurance. Trump promised expanded access to healthcare coverage during the 2016 campaign and argued that Obamacare was stopping people from accessing quality insurance. In office, however, Trump has down the opposite, eliminating the individual mandate, reducing federal government subsidies to individuals on the exchanges, and encouraging work requirements for Medicaid that have kicked tens of thousands off of the program. As a result, 2017 was the first year that the uninsured rate didn’t fall since 2009, and the uninsured rate actually rose by 0.3% for households earning less than $100k/year. By contrast, the uninsured rate fell by an annual average of 1.6% in Obama’s second term, and by 1.7% annually for households making under $100k/year.

After two years of the Trump administration, then, how has the US economy performed? Jobs and wage growth have fallen, even in the face of a surging fiscal deficit. The trade deficit has increased significantly thanks to Trump’s own trade policies. And the most vulnerable Americans have seen their access to healthcare worsen for the first time in a decade.  

In New Global Age, Dems Have Produced Prosperity, the GOP Decline

This essay originally appeared on Medium.

Earlier this week, Bloomberg News published a new analysis of America’s economic performance under the past seven Presidents. The report ranks the economic progress made during each Presidential term since 1977 based upon 14 gauges of economic and financial activity, from wage growth to job gains to economic growth. On aggregate, Clinton and Obama take the top two spots, followed by Reagan and H.W. Bush in third and fourth, with Carter, Trump, and W. Bush coming in fifth, sixth, and seventh. Perhaps most importantly, this ranking shows the deep discrepancy in economic performance between the two parties. The last two Republican Presidents have overseen the two worst economies since 1977, while the last two Democratic Presidents have managed the two best economies. In this new age of globalization since the end of the Cold War in 1989, the two Democrats (Clinton and Obama) rank one and two, while the three Republicans (H.W. Bush, Trump, and W. Bush) rank three, four, and five. For all his bluster about “the best economy ever,” Trump ranks second-to-last behind even Jimmy Carter, and ranks above average among the seven Presidents on only 2 of the 14 metrics.

Source: Bloomberg

This study is consistent with the big argument that NDN has been making through our Patriotism and Optimism Project that the two parties’ recent performances while in the White House are not symmetrical, particularly on economic issues. While Trump’s central argument about the economy has been that this new age of globalization has failed to deliver economic prosperity to most Americans, regardless of which party has been in power, it is actually the case that Democrats have made the new global economy work for everyday Americans, while Republicans have failed to do so. Since 1989, the two Democratic Presidents (Clinton and Obama) have overseen strong and inclusive economic growth, while the three Republican Presidents (H.W. Bush, W. Bush, and Trump) have seen economic under-performance and even recession and decline. Rather than broad economic trends, it is the wide difference in economic management between the two parties that has shaped America’s economic fortunes.

Aggregate data that NDN has compiled for our Patriotism and Optimism Project confirm the startling asymmetry between the two parties on the economy. On job growth, Clinton and Obama have overseen almost 4 times the yearly gains as H.W. Bush, W. Bush, and Trump (averaging an increase of 2.12 million jobs per year compared to only 0.63 million jobs per year for the three Republicans). In total, the two Democrats oversaw an increase of 34 million jobs during their tenure, while the three Republicans saw only 9 million new jobs.

Source: BLS

On median income growth, meanwhile, Clinton and Obama averaged growth of 1.2% per year, whereas the three Republicans averaged a decline of 0.4% per year. All the more alarming is that even though the Republican Presidents achieved poor job and income growth during their tenures, they did so while also increasing the budget deficit significantly more than the Democratic Presidents. H.W. Bush, W. Bush, and Trump increased the deficit by an average of 0.5% of GDP per year, whereas Clinton and Obama reduced the deficit by an average of 0.4% of GDP per year. As can be seen, the difference in economic performance between Democrats and Republicans has been stark and significant.

Source: Federal Reserve Bank of St. Louis

Looking over the data, it is clear that the Democrats have been the party of economic progress and fiscal sustainability, whereas the Republicans have boosted deficits while achieving poor job and income growth. It is unsurprising, then, that the two generations that have grown up since 1989 (Millennials and Gen Z) are strikingly Democratic-leaning. In the 2018 midterms, voters under age 29 supported Democrats by a 35-point margin, and voters under 45 by a 25-point margin. For these voters, who will soon make up the majority of the electorate, America has succeeded both economically and socially under two successful Democratic Presidents, whereas Republicans have had three consecutive failed Presidents.

Invite: Thurs, Feb 7th - NDN's "Patriotism, Optimism"

Over the past year or so Simon has been making a big argument about the past and future of the center-left in America.  Called "Patriotism and Optimism," it makes the case that America is not in decline and is in fact doing as well as it has in any point in its history. It is meant to be an explicit rebuttal to the core argument Trump is making about America and its decline, an argument which is malevolently selling America and its people short every day. 

This primary way this argument has made itself into the world is through a 45 minute long Powerpoint deck, which has been seen in dozens of showings over the web and live in person to policy makers here in Washington and around the country. Our next showing of the deck will be Thursday, February 7th from 12:00pm to 1:15pm at our new offices at 800 Maine Avenue SW, Washington, DC. Lunch will be served. You can RSVP for the event and learn more here. For background before the showing, feel free to check out some related readings below.

Key Background Readings On "Patriotism and Optimism"

The Case for Optimism: Rejecting Trump's Poisonous Pessimism, Simon Rosenberg, Medium, 6/2/17. In an essay that originally was published on Medium, Simon argues that the great rationale of Trump's Presidency  –  that America is in decline – simply isn't true, and must be challenged more forcefully.  This is the piece that spurred the creation of the presentation. 

Chin Up, Democrats, Simon Rosenberg, US News and World Report, 1/20/17. In his column Simon argues that Democrats should have pride in their historic accomplishments and optimism about the future of their politics. This one is very relevant to the presentation itself. 

A Center-Left Agenda for the Trump Era - Simon Rosenberg, US News and World Report, 12/9/16.  In the early days after Trump's election Simon layed out a possible agenda for the Democrats centering on prosperity, security, shoring up the American led liberal order and ambitiious efforts to reform our political system. 

Additional Readings

Some Thoughts On the Caravan - By Simon Rosenberg, Medium, 10/24/18.  The Caravan, composed of 7,000 poor, unarmed, mostly Honduran Central Americans, poses no threat to the US, and illegal border crossings continue to be way down. Some thoughts on what Democrats should do to respond to Trump's farcical attacks and terrible policies.

Are We Better Off Under Trump? The Short Answer Is No - By Simon Rosenberg and Chris Taylor, NDN, 10/18/18.  Most measures of the US economy are worse today than when Trump took office. Worse still, the President’s policies have made it very challenging to manage the next recession or global economic downturn.

Challenging Trump's Tariffs - An Ongoing Series - By Chris Taylor, 10/17/18.  In a new series challenging Trump's tariffs, we argue that the President's trade policy is illegal, recklessly ignorant, damaging to the US economy, and historically unpopular. Congress must step up and rescind them in the coming months. 

Trump's Immigration Strategy Is Failing - By Simon Rosenberg, NBC News, 8/6/18.  Almost nothing the President has done on immigration and the border has worked; expect more extreme policies as the elections approach. 

Congress Must Debate The Weakening of Global Order - By Simon Rosenberg, NBC News, 5/10/18.  Few presidents have inherited a world or a nation in which more was going right. Trump seems determined to undo it all.

The Pernicious Politics of Oil - Simon Rosenberg, US News and World Report, 12/16/16.  Petro-powers are challenging the global order, and the next president seems uninterested in stopping them.

An Enduring Legacy: The Democratic Party and Free and Open Trade - Simon Rosenberg, Huffington Post, 1/24/14.  The global system created by Presidents FDR and Truman has done more to create opportunity, reduce poverty and advance democracy than perhaps any other policies in history. 

Trump’s Tariffs Are A Growing Threat To The American And Global Economies

This is the eighth article in a series produced by NDN challenging Trump’s tariffs.

Today there is a growing body of evidence that one of Trump’s signature policy proposals, the tax cut, hasn’t delivered the economic returns promised by the President. I will argue in this piece that his other major initiative, the protectionist trade policy, has also failed to deliver on his promises. In launching the tariffs, Trump’s promises to Americans were simple: strengthen growth, reduce the trade deficit, and help US manufacturing. By any account, each one of these has failed. Instead, the trade war is now viewed as a growing risk to the global economy, and threatens to weaken the strong economy that Trump inherited in 2017.

Risks to Economic Growth

Since mid-summer, future growth expectations for the US and global economies have rapidly declined.  In Bank of America’s November investor report, 44% of investors expected a decline in global growth in 2019, the highest number surveyed since November 2008 on the eve of the Great Recession. In October, meanwhile, the IMF reduced their forecast of global growth for both 2018 and 2019 from 3.9% to 3.7%, representing a global income loss of almost $530 billion. This weakening of the global economy is likely to put significant downward pressure on US growth as well. Goldman Sachs now forecasts that US growth will fall from 3% this year to 2% in 2019, and will hit only 1.6% in the fourth quarter of 2019. Similarly, JP Morgan estimates that growth will decline from 3.1% this year to 1.9% in 2019, and will hit just 1.5% in Q4 2019.

Trump’s trade policies, which have placed tariffs on $250 billion of Chinese imports and $50 billion of steel and aluminum imports primarily from Canada and the EU, have played an important role in this slowdown. First, higher tariffs mean that domestic companies have to pay more for intermediate inputs, putting downward pressure on jobs, income, and capital investment as firms have to account for higher costs. Second, with less access to cheap foreign goods, the purchasing power of domestic consumers falls, meaning that workers can buy fewer products for every dollar they earn. Finally, tariffs create inflationary pressures by taxing low cost goods, which forces the Fed and other central banks to hike interest rates faster, thereby tightening financial conditions in the global economy. It is no surprise, then, that in Bank of America’s November investor report that found 44% of investors expecting a decline in global growth in 2019, investors cited Trump’s trade war as the biggest risk to the global economy (35% of investors), ahead of the Fed’s rate hikes (26% of investors), and rising corporate debt (14%). Business investment, a key component of growth and something heavily affected by firms’ input prices and consumer demand, has likewise slowed significantly in the face of Trump’s trade policies. Non-residential private investment rose only 2.5% in Q3 2018, compared to an average of 10.1% in the first half of 2018 and 6.3% in 2017. Furthermore, new durable goods orders have fallen for two straight months and are down 1.2% since June, significantly lower than the 2.3% growth seen in January to June 2018.

Worsening of the Trade Deficit

The six months since June have also seen a large widening of the trade deficit, and the US today is running its largest trade deficits since 2008. Since the tariffs were enacted, the trade deficit has increased by 18.1%, compared to economic growth in that period of 1.8%. Since June, the trade deficit has averaged $50.8 billion per month, which is 5% higher than its Jan-May 2018 average, 10.4% higher than its 2017 average, and 21.4% higher than its 2016 average under Obama. Given that one of the biggest impetuses behind Trump’s tariffs was to reduce the trade deficit, the policy as a whole seems to have faltered.

Driving the increase in the trade deficit, firstly, has been a decline in US exports. Exports have fallen at a 0.6% annualized rate since June, compared to an increase of 8% (annualized) in Jan-June 2018, 7.8% in 2017, and 4.1% in 2016. Secondly, US imports have skyrocketed since the tariffs were enacted, even though one of their major purposes was to encourage the substitution of imports with domestic production. Imports have risen at a 12% annualized rate since June, compared to 0.2% (annualized) in Jan-June 2018, 9.7% in 2017, and 4.5% in 2016. These trends are unsurprising given the effects of Trump’s tariffs. Almost $150 billion of US exports have had retaliatory tariffs enacted against them by our trading partners, and crucial intermediate inputs like steel and aluminum have seen their prices rise by over 20%, making American products uncompetitive abroad and at home.

Harms to US Manufacturing

Outside of the major macro-economic goals of improving growth and reducing the trade deficit, the tariffs were also primarily crafted to help US manufacturing. Instead, however, American manufacturing companies have been strongly hurt by the tariffs, and the auto industry in particular has seen its global competitiveness weakened. Since June, the S&P 500 Industrials index (which covers industrial companies within the S&P 500) has fallen by 5.1%. By contrast, it rose at an annualized rate of 11.8% from January 2017 to June 2018 and by an annual average of 14.2% during Obama’s 2nd term.  

GM, meanwhile, has seen a 15.2% decline in its stock price since June and earlier this week announced the layoff of 14,000 workers in North America and the closure of five plants. This is on the back of the company losing $1 billion in earnings in 2018 alone as a result of Trump’s steel and aluminum tariffs, and a 15% decline in GM’s sales in China in October as a result of worsening trade tensions. Similarly, Ford’s stock price has fallen 20.1% since June and the company last month announced likely layoffs of 12% of its global workforce (24,000 workers). Ford too reported that Trump’s tariffs would cost the company over $1 billion in earnings this year. Tesla also reported a drop in its China sales of over 70% in October, after warning last month that the trade war would harm its business. Finally, new reports suggest that the 25% tariff on foreign-made autos that Trump is considering would destroy a further 715,000 jobs in the auto industry and reduce annual GDP by $59 billion. Rather than revitalize US manufacturing, Trump’s tariffs instead have reduced its global competitiveness. With rising input costs and constrained export access, US companies particularly in the auto industry have been forced to lay off workers and close plants.

Large Losses in American Agriculture

The second biggest supposed benefactor from Trump’s tariffs were American farmers, who Trump claimed were taken advantage of by Canada and European protectionism. More so than any other industry, Trump’s trade policy has significantly harmed American agriculture. From June to September 2018 (the most recent data), US agricultural exports fell 1.8% YoY and the US trade surplus in agricultural products fell by 26%. As a result, the recent increase in farm bankruptcies throughout the country that began in 2017 has continued unabated, reaching levels over twice as high as those in 2013 and 2014. Soybean farmers in particular have been devastated by Trump’s trade war with China, and have seen a 97% decline in exports over the past three months.

Furthermore, while $12 billion in government bailouts has kept some farmers afloat, the damage done to agriculture (and to the rest of the US economy) will continue long after the tariffs are rescinded. New supply chains that exclude American workers, instead going to Canadian and Brazilian exporters, have been developed in place of American ones that took decades to develop. Further, the level of uncertainty over basic trade policy created by the Trump administration makes it less likely that American or foreign firms will invest in long term projects in the US.

Today there is an overwhelming body of evidence that Trump’s tariffs are unpopular and causing material harm to the US and global economy. The question now is, what do we do about it? In a recent Wall Street Journal interview, Trump showed that he doesn’t understand what he’s doing and that no rigorous analysis backs up his views on trade. As a result, it is unlikely that he can offer ideas to address the growing risks of the trade war with China and the conflict with our closest allies over auto tariffs. It will be up to members of both parties in the next Congress to challenge Trump far more directly on his reckless trade policies, and remove the threat to the US and global economies. 

2018 Was A Very Good Election For Democrats, And An Even Better One For Their Future

This piece is part of a series by NDN analyzing the 2018 election.

Much has been made about whether to call the 2018 midterms a “wave” election for Democrats. During election night, pundits were quick to capitalize on some early evening setbacks for Democrats to argue that the Party had underperformed their polls. However, with a dominating performance in California and strong results in Arizona coming in over the past week, it is clear that 2018 was indeed an historic wave election for Democrats.

National Popular Vote

The House popular vote is the best way to conceptualize the election results as a whole. It includes every voter in the country, isn’t affected by district gerrymandering, and ignores the partisan lean of the Senate seats up in a given year’s cycle. As of November 17th, Democrats had a 7.7% lead in the popular vote ahead of Republicans, and this is likely to end up close to 8% once all of California’s ballots are counted. How does this compare to previous elections? Firstly, it will likely be the largest popular vote win by any party in a national election since 1996 (when Democrats won by 8.5%) – larger than Republican’s 6.8% margin in 2010, Obama’s 7.2% margin in the 2008 presidential election, and likely Democrat's 8% margin in 2006. Second, compared to the three definitive midterm “wave” elections of the modern era (1994’s 7.1% margin for Republicans, 2006’s 8% margin for Democrats, and 2010’s 6.8% margin for Republicans), it is right at the top. Third, while Democrats have passed the 7.7% margin twice in the modern era, this margin is larger than any Republican electoral margin since 1988 (when Bush won the presidency by a 7.8% margin) and any Republican House margin since 1946 (when Republicans won by 8.5%). Fourth, the Democrats have won 53% of the vote in 2018 so far and are on track to hit near 53.2% once all of California comes in, which beats Obama’s 52.9% in 2008 for the largest percentage won by Democrats since 1986. Finally, the 37-40 seat pick-up by Democrats (depending on a few seats not yet called) will be the largest gain by Democrats since 1974. Clearly then, this election was one of the best showings by either political party in recent decades.

Young Voters

Even more decisive than its actual results, however, was what this election said about the future of the two-party system. In every demographic group that will increase its share of the electorate in future years, Democrats won unprecedented victories. Firstly, young people. Democrats won the 18-29 age group by 35%, the largest margin by any party for that demographic group ever recorded (data goes back to 1992 for House races and 1976 for Presidential ones). For context as to how dramatic a shift this has been, in 1998 this age group went 50-50 to Democrats and Republicans. For all under 45s, Democrats won by 25%, also the largest margin ever recorded for this group. As late as 2004, Republicans were winning this demographic group by 1% (and by 6% in 2002). The catastrophic Republican performance among young people cannot be overstated. In every single state with an exit poll in 2018, Democrats won the 18-29 group, including deep red seats like Mississippi (D+6 among 18-29 year olds), Tennessee (D+16), and Georgia (D+29). In Texas, a state where Republicans won 18-29 year olds by 5% in 2008, Democrats won that age group by 42%.

Hispanic and Asian Voters

Hispanic voters, who made up 11% of the electorate this year compared to 6% in 1998, showed a very similar trend. Democrats won the Hispanic vote by 40% in 2018, the 2nd highest margin among this demographic group since 2000 after Obama’s 44% margin in 2012. By comparison, Democrats won Hispanics by only 26% in 2014. Among Asian voters, who this year comprised 3% of the electorate versus 1% in 1998, Democrats won by 54%, their highest ever margin among this demographic. Among college-educated voters, meanwhile, Democrats won by a 20% margin, also the highest margin for either party since at least 1992. This compares to a Republican win of college-educated voters by 3% in 2014 and by 8% in 2010.

Democrats won an historic victory in 2018 among all voters, but their dominating victories among all of the emerging demographic groups should cause Republicans significant concern. In the early 2000s, the Republican Party put significant effort into reaching these voters, and they were rewarded in the 2004 presidential election with historic support from under 45s (R+1) and Hispanics (D+9). Under Trump, however, the party has harshly veered from that trajectory and has been decisively repudiated by those groups as a result. The R+1 among under 45s in 2004 has turned into a D+25 in 2018, while the D+9 among Hispanics in 2004 has turned into a D+40 in 2018. Unless Republicans can dramatically change how they are viewed by these groups, their long term path to power seems difficult.

Trump’s Tax Cuts Have Failed To Deliver On Their Promises

Trump’s tax cuts and tariffs have been the pillars of his administration’s economic policy and rhetoric around the economy. We’ve addressed the tariffs earlier, so now we’ll take a closer look into the tax cuts. Taking effect in January of this year, they were promoted as beneficial to long-term economic growth by strengthening the labor market and increasing business investment. Almost a full year into the plan, however, the results have been underwhelming. Each of those mechanisms for boosting growth has fallen flat, while the tax cuts instead have significantly increased the budget deficit and sent interest rates surging.

First, how have the tax cuts affected the labor market? While Trump often touts a record-low unemployment rate, much of that progress was made pre-2018, so it is helpful to look at the change in the trajectory of the labor market since the tax cuts went into effect in January 2018. Since then, the unemployment rate has fallen by an annualized 0.5 percentage points (pp), compared to a decline of 0.6pp in 2017 and an average decline of 0.5pp in 2015-16. Very normal looking. But the unemployment rate doesn’t tell the full story – it can fall based upon people becoming discouraged and leaving the labor force rather than getting jobs, so it’s helpful to also look at prime age labor force participation. Here the case for a tax cut-driven labor market boost looks very poor. Since December 2017, labor force participation has actually fallen by 0.1pp, compared to gains of 0.5pp in 2017 and 0.4pp in 2016. Both unemployment and labor force participation are included in the prime age employment-to-population ratio, making that metric a good barometer for the health of the labor market as a whole. Since December 2017, it has increased by 0.3pp, a much slower growth rate than gains of 1pp in 2017 and 0.7pp in 2016. On Trump’s promise of a higher trajectory for the labor market then, what has been the result? Rather than seeing a surge in job growth, the labor market actually appears to be on a lower growth trend in 2018, even in the midst of the tax cut’s $202 billion fiscal stimulus to the economy this year alone.

Second, how has business investment changed since the tax cut was enacted? Since then, real non-residential fixed investment has increased by a quarterly average of 7% (annualized), only slightly larger than the 6.3% quarterly average increase in 2017. For manufacturers, meanwhile, orders of capital goods have increased 5.5% this year (annualized), much less than the 10.5% growth seen in 2017. So investment growth this year seems to be rather similar to what it was in 2017, a significant blow to Trump’s claims that the tax cut would supercharge investment spending. Taking the non-residential investment number, the dollar value gain from increasing investment growth from 6.3% (in 2017) to 7% (in 2018) is $18.1 billion. Compared to a loss of revenue of $202 billion into the Treasury in 2018 alone, this means that for every $100 in tax cuts, only $9 in new investment spending was created. Even this simple analysis overstates the tax cut’s impact on investment. This impact is very front-loaded (because firms will invest now if they think there will be more demand in the future), so it’s likely that investment growth will slow down now from its already moderate level. Indeed, non-residential investment grew at an annualized rate of only 0.8% in the 3rd quarter of this year, and manufacturer’s orders of capital goods have actually declined for two straight months since July.

So the tax cut has done little to spur the boosts to the labor market and investment spending that Trump argued would lead to stronger long term growth. It is no wonder then that the Congressional Budget Office projects less than stellar growth effects from the tax cut. While it is true that the tax cut will increase growth this year and next, they estimate that it will actually reduce growth each year from 2022 to 2027 (the last year studied). Overall, they estimate that the tax cut will increase real GDP by 0.7% by 2027, equal to about $180 billion out of an estimated GDP of $25 trillion, compared to an increase of $1.8 trillion to the federal debt. As a result, for every $10 of tax cuts, only $1 of new growth will be created, for a multiplier of only 10%. By contrast, economists estimate that the multiplier for infrastructure spending is much higher (with some showing it closer to 80%).

While its benefits to growth, jobs, and investment have been minimal, the costs of the tax cut to the economy are large and will heavily weigh down future prosperity. First, the tax cut has blown a hole into the federal budget. While Trump and Mnuchin have repeatedly said that the tax cut will pay for itself, corporate tax revenue fell $91 billion in 2018 and overall revenue was $202 billion less than the CBO’s pre-tax cut projection. As a result, the entire $113 billion increase in the federal deficit from 2017 to 2018 could have been wiped out if the tax cut hadn’t reduced revenues so significantly. The rapidly rising deficit has made it very challenging to manage the next recession, of which JP Morgan projects there is a 60% chance within the next two years. By 2020, the federal deficit will be 4.6% of GDP (compared to 1.1% in 2007 on the eve of the Great Recession), meaning that there will be little room for fiscal stimulus to boost a recovery.

Second, the tax cut has played an important role in raising interest rates throughout the economy. While the Fed clearly has a significant effect on rates, the tax cuts increased the supply of US government debt (by increasing deficits), causing yields on that debt to increase. Furthermore, the increase in stock prices as a result of increasing corporate profits made bonds less attractive to investors, also causing an increase in yields. As a result, since January, yields on the 10-yr treasury have increased from 2.4% to 3.1%, while the interest rate on an average 30-yr fixed rate mortgage has increased from 4% to 4.9%. This increase in rates will have a major negative effect on the US economy. First, rising rates have been part of the reason why the US stock market has performed so poorly over the last month (with the S&P 500 currently down 1.8% for the year) and why new housing starts have suffered a significant decline, falling 5.3% in September alone. Second, rising rates reduce the disposable incomes of average Americans. The increase in average mortgage rates from 4% to 4.9% means that the average new American homeowner will pay an additional $1,800 per year (compared to a total increase in median household income of $1,000 from 2016 to 2017). Finally, rising rates mean that the government has to pay more interest on the federal debt. By 2028, the CBO estimates that interest payments will cost 3.1% of GDP, greater than the cost of Medicaid and over four-fifths of total US military spending.

Trump’s tax cut was sold as a minimally expensive way to improve America’s long term growth trajectory. Instead, trend growth has barely moved, while the country’s ability to deal with a worsening fiscal outlook and future recessions has been harmed significantly. Looking back, however, these outcomes do not seem surprising. The US economy was close to full employment in December 2017, and US companies had had access to near-zero interest rates to finance investment for almost a decade. It is little wonder, then, that Trump’s tax cut has failed in the promises that he made to Americans.

Are We Better Off Under Trump? - A Series

In a new series challenging Trump's economic policy, we argue that Americans are not better off after almost two years of the Trump administration. Job and wage growth is down, the trade and budget deficits have surged, and healthcare access has declined for the middle class and poor. Further, the decline in export opportunities for US businesses and significant deterioration in the fiscal sustainability of the government mean that Trump's policies will harm Americans for years to come. 

Trump's Tax Cuts Have Failed To Deliver On Their Promises - 10/30/18 - Trump’s tax cut promised to boost growth by strengthening the labor market and business investment, but today both metrics look very similar to their pre-tax cut trend. Instead, the deficit has surged to unprecedented levels and rapidly increasing interest rates are hurting ordinary Americans.  

Are We Better Off Under Trump? Charts, Graphs, Data - 10/25/18 - After Trump's first two years, jobs and income growth is slower, while the budget and trade deficits have surged. This presentation highlights the data behind NDN's argument that Americans are not better off under Trump.

Are We Better Off Under Trump? The Short Answer Is No - 10/18/18 - Most measures of the US economy are worse today than when Trump took office. Worse still, the President’s policies have made it very challenging to manage the next recession or global economic downturn.

Challenging Trump's Tariffs - An Ongoing Series - 10/12/18 - In a new series challenging Trump's tariffs, we argue that the President's trade policy is illegal, recklessly ignorant, damaging to the US economy, and historically unpopular. Congress must step up and rescind them this fall.

Aditional writings from Rob Shapiro:

The Latest Outlook On The Economy: Another Canary Swoons - 10/24/18 - There are growing signals of a possible recession 10 to 15 months from now - a flattened yield curve, weak investment growth, and stagnant productivity. On top of that, big drops in new home sales threaten to throw the construction industry, and the 7 million workers it employs, into a downward spiral. 

Don't Be Fooled: Working Americans Are Worse Off Under Trump - 9/30/18 - The typical working American's earnings, when properly measured, have declined during the Trump administration. It is no wonder, then, that Americans have been unmoved by economic news over the past two years.

Are We Better Off Under Trump? - Charts, Graphs, Data

Last week, NDN produced an analysis arguing that Americans are not better off after two years of the Trump administration. We took a look at jobs and income growth, the level of the budget and trade deficits, and metrics affecting the lives of everyday Americans such as mortgage rates, healthcare insurance, and gas prices, and concluded that most measurements showed a weakening economy compared to the one Trump inherited in early 2017. 

The attached presentation takes this argument and visualizes the data that backs it up. Compared to the last two years of Obama's presidency, job growth in 2017 and 2018 has not been very impressive, even in the midst of significant fiscal stimulus.

Furthermore, deficits have surged under Trump and are projected to continue growing as a result of the President's tax cuts, which reduced revenue by $200 billion in 2018 alone.

To find other data on the Trump economy, click on the presentation slides below.

Are We Better Off Under Trump? The Short Answer is No

This piece follows articles by Simon Rosenberg on NDN.org and Rob Shapiro in The Washington Post that take a look at the same issue in slightly different ways. You can find the data and charts that accompany this piece here.

When Donald Trump entered office the American economy had recovered from the Great Recession and just seen two very strong years.  While the economy was very good in Obama’s second term, it was particularly good in 2015-2016 – strong job and wage growth, a booming stock market, low interest rates, low energy prices, a big decline in the uninsured rate, lower than usual health care cost increases, and a rapidly declining annual deficit.   Despite Trump’s “carnage” rhetoric, the economy was in good shape in late 2016 with no real dark clouds on the horizon.

Since assuming office the President aggressively implemented a very different approach than his predecessor on economic and fiscal matters, trade, health care, and many other issues.  Enough time has passed to evaluate whether this new Trumpian approach has worked, and made the good economy he inherited better.   Let’s start with the negative side of the ledger:

Job, wage, and income growth have slowed – In 2015 and 2016, monthly job growth averaged 211,000 jobs under Obama.  Under Trump, monthly job growth has averaged 193,000 jobs, a decline of almost 10%.  

In 2015 and 2016, median household income increased by 5.2% and 3.1%. In 2017 median household income increased by only 1.8%. Similarly, real wages for all workers increased by an annual average of 1.6% in 2015-16.   In 2017-18 they have increased by an average of only 0.5%.    

The annual deficit has exploded - During Obama’s second term, the deficit averaged 3.09% of GDP while under Trump it has averaged 3.66%. Furthermore, the CBO projects that the deficit will surge to 4.6% of GDP in 2019 and 2020. According to a new study, all of that increase stems from Trump’s tax cut, which makes sense given that it is unusual that the deficit would increase significantly while the economy is close to full employment.

Gas prices are rising - The average gas price in 2015 and 2016 was $2.29/gallon.  It rose to $2.42/gallon in 2017 and $2.88/gallon in 2018.  While many factors affect gas prices, the President’s renewed sanctions on Iran have played a significant role in recent increases.

Interest rates are rising -. Since Trump took office the yield on the benchmark 10-yr US Treasury has increased from 2.45% to 3.16%. This 0.71 percentage point (pp) increase compares to a gain of only 0.23pp in Obama’s last two years in office. The rate on a standard 30-year fixed mortgage has increased by 0.58pp under Trump, after increasing only 0.45pp in Obama’s last two years.  

Interest rates and gas prices are at least 25% higher than when Trump took office, making every day things far more expensive for the American people.  Credit card monthly balances, car loans, mortgages, and driving to work all cost significantly more now under Trump.  For those in the middle class and those striving to get there, this is no small thing. 

The trade deficit is widening – The trade deficit averaged $389 billion in Obama’s second term.  In 2017 it hit $449 billion, the largest such deficit since 2008. The 2018 numbers so far are even higher than 2017.    

Tariffs are hurting American businesses and consumers – There is a great deal of data to back this up but we will share just a few of the most important.  In the auto industry, estimates are that Trump’s tariffs on Chinese vehicles and auto parts will increase the price of a typical vehicle by $4,400 and eliminate 715,000 jobs. Farmers, meanwhile, will lose over $12 billion in earnings this year alone as a result of Trump’s trade policies.  Estimates suggest the President’s steel and aluminum tariffs alone will cause the loss of another 179,000 jobs in manufacturing and services. It is little wonder, then, that Trump’s trade policy is historically unpopular, with voters opposing his tariffs 46-28 in Pennsylvania, 41-29 in Missouri, and 47-39 in Wisconsin.

The decline in the uninsured rate has slowed, for some it is increasing now - Under Obama, the uninsured rate steadily declined, with drops of 2.9pp in 2014, 1.3pp in 2015, and 0.3pp in 2016. This progress abruptly stopped under Trump, with the uninsured rate remaining at 8.8% in 2017, representing the first year since 2010 that the uninsured rate had not fallen. Furthermore, 2017 was the first year since 2010 that the uninsured rate gap between those making over $100,000/year and those making under $100,000/year actually increased. In 2017, higher income earners (over $100,000/year) saw a decrease in their uninsured rate by 0.2pp, while lower income earners (under $100,000/year) saw an increase in their uninsured rate by 0.3pp. 

Rising uninsured rates for those struggling to get by will of course also make it far harder to tackle the opioid epidemic. In 2017, over 72,000 people died as a result of the opioid crisis, compared to 64,000 in 2016 and 52,000 in 2015. Meanwhile, evidence suggests that expansion of healthcare access reduces drug overdose deaths.

Even coal production has declined - Even US coal production continues to stay at record-low levels under Trump. During Obama’s second term, annual coal production averaged 903 million short tons.  In 2017 coal production was only 774 million short tons and estimated production in 2018 will be even less, coming in at 741 million short tons.

To be fair, not everything is worse today.  Let’s look at the positive side of the economic ledger:

GDP growth has increased - During Obama’s second term, annual real GDP growth averaged 2.3% (and only 2% in 2015-16). In 2017, however, real growth increased by 2.6% and the CBO projects that it will increase by 3.1% in 2018. As a result, growth under Trump in 2017-18 will average 2.85% compared to the 2.3% it averaged in 2013-16 under Obama.

However, when put into the context of the significant fiscal stimulus that Trump has undertaken, the level of GDP growth we’ve experienced may actually deserve to sit on the negative side of the balance sheet.  The CBO estimates that Trump’s tax cut will increase the federal debt by $1.8 trillion by 2028. They also estimate that the tax cut will increase real GDP by 0.7% by 2028, equal to about $180 billion out of an estimated GDP of $25 trillion. As a result, for every $10 of tax cuts, only $1 of new growth will be created, for a multiplier of only 10%. By contrast, economists estimate that the multiplier for infrastructure spending is closer to 80%.  In other words the stimulus was badly designed and is providing the American people a very low rate of return. 

So while GDP is up a bit under Trump this growth is not providing the kind of across the board benefits we would expect to see – wages and job growth haven’t picked up – and it has come at the cost of the fiscal integrity of the US. 

The stock market has made strong gains, but not as strong as Clinton and Obama - Since Trump took office, the S&P 500 has gained almost 24%, representing wealth creation of over $5.3 trillion. Similar to the increase in GDP growth, however, context makes this metric less impressive. During Obama’s second term in office, the S&P 500 increased by 57%, an average annual increase of 14.3% compared to Trump’s average increase of 13.6%. During Clinton’s second term, furthermore, the S&P 500 increased by 76.5%, an annual increase of 19.1%.

Like with Trump’s growth numbers, the modest increase in the stock market we’ve seen is actually disappointing given that virtually all of the stimulus went to American companies and the investor class. 

So are we better off? Most measures of the US economy are worse today than when Trump took office.  Job, income, and wage growth all have slowed, while costs for everyday things are rising dramatically.   The modest increases we’ve seen in GDP and the stock market have come at an extraordinary cost, as the 2017 tax bill provided a very badly designed and inefficient stimulus which simply isn’t providing the kind of returns the American people should have expected. 

Worse still, the President’s policies have made it very challenging to manage a recession or global economic event if it were to come.  By 2020, the federal deficit will be 4.6% of GDP (compared to 1.1% in 2007 on the eve of the Great Recession), meaning that there will be little room for fiscal stimulus to boost a recovery. Furthermore, our economic and diplomatic relations with the most advanced economies in the world have been frayed through Trump’s aggressive tactics, and his economic team is among the weakest in modern US history.  Finally, Trump’s economic policy has worsened the long-term future of the country. By the time the next presidential term starts in 2021, the CBO estimates that GDP growth will be 1.5% (compared to 2.3% in 2013-16), interest rates on new debt will be 4.1% (compared to 2.1% in 2013-16), and the deficit will be 4.9% of GDP (compared to 3.1% in 2013-16).  

So, are we better off under Trump? Based on our analysis, we think the answer is no.

Syndicate content