Category Archives: The Economic Crisis

Why Voters Are Upset 2: The Proximate Causes of the Underperformance of the US Economy Since the 2008 Crash

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Chart 1

A.  Introduction

The previous post on this blog described the slowdown in US growth since the 2008 crash.  GDP fell sharply in the second half of that year – the last year of the Bush administration – due to the crisis in home mortgages leading to a broad collapse in the financial markets.  It led to what has been termed the “Great Recession”.  But unlike in past recessions, GDP never recovered to its previous trend path, even though the unemployment rate fell to lows not seen since the 1960s.  GDP remains well below that previous path today.  The chart above shows how that gap opened up and has persisted since 2008.

The question is why?  The unemployment rate had averaged 4.6% in 2007 – the last full year before the 2008/09 economic and financial collapse.  While the pace of the recovery from the collapse was slowed by federal budget cuts, the economy eventually did return to full employment.  The unemployment rate was at or below 5% in Obama’s last year in office and then continued on the same downward path during the first three years of the Trump administration.  It averaged 3.9% in 2018 and 3.7% in 2019, and hit a low of 3.5% in September 2019.  After the brief but sharp 2020 Covid crisis, the unemployment rate then went even lower under Biden, reaching a low of just 3.4% in April 2023 and averaging just 3.6% in 2022 and again in 2023.  The unemployment rate has not been this low for so long since the 1960s.

In prior times, GDP would have returned to the path it had been on once the economy had recovered to full employment, with resources (in particular labor resources) being fully utilized.  But this time, despite unemployment going even lower than it had been before the downturn, GDP remained far below the path it had been on.  By 2023, real GDP would have been almost 20% above where it in fact was, had it returned to the previous path.  That is not a small difference.

That is, while the economy recovered from the 2008 collapse – in the sense that it returned to the full utilization of the labor and other resources available to it – economic output (real GDP) with that full utilization of resources was stubbornly below (and remained stubbornly below) what it would have been had it returned to its prior growth path.  The economy had followed that path since at least the late 1960s (as seen in the chart above).  Indeed, that same growth path (in per capita terms) can be dated back to 1950 (as the previous post on this blog showed).

This post will examine the proximate factors that led to this.  The post will look first at the growth in available labor.  It has slowed since 2008.  This has not been due to a fall in the labor force participation rates of the various age groups, as some have posited.  We will see below that holding those participation rates constant at what they were in 2007 (for each of the major age groups) would not have had a significant effect on labor force totals.  Rather, labor force growth slowed in part simply because the growth in the overall population slowed, and in part due to demographic shifts:  A growing share of the adult population has been moving into their normal retirement years.  It is not a coincidence that the first of the Baby Boom generation (those born in 1946) turned 62 in 2008 and 65 in 2011.

The second proximate factor is available capital – the machinery, equipment, and everything else that labor uses to produce output.  Capital comes from investment, and we will see below that net investment as a share of GDP has fallen sharply in the decades since the 1960s.  Overall net fixed investment fell by more than half.  This led to a slowdown in capital growth, and especially so after 2008.  There was an especially sharp reduction in public investment.  Since 2008, net public investment as a share of GDP has been only one-quarter of what it was in the 1960s.  It should be no surprise why public infrastructure is so embarrassingly bad in the US.  And net residential investment (as a share of GDP) is only one-third of what it was in the 1960s.  The resulting housing shortage should not be a surprise.

The third proximate factor is productivity.  Labor working with the available capital leads to output.  How much depends on the productivity of the machinery, equipment, and other assets that make up the capital, and that productivity grows over time as technology develops and is incorporated into the machinery and equipment used.  We will see that the rate of growth in productivity fell significantly after 2008.  Given the reduction in net investment and the consequent slowdown in capital accumulation after 2008, it is not surprising that productivity growth also slowed.

For a rough estimate of the relative importance of these three factors – labor, capital, and productivity – I developed an extremely simple Cobb-Douglas production function model to simulate what could be expected.  Despite being simple, it turned out to work surprisingly well both in terms of tracking what actual GDP was (for given employment levels) and in tracking the trend path for GDP given the trend paths of labor, capital, and productivity.

As noted above, the trend level of GDP in 2023 was almost 20% above what GDP actually was in that year – a year when unemployment was at record lows.  Despite being at full employment, the economy was not producing more.  Based on the Cobb-Douglas model, roughly a quarter of the shortfall can be attributed to a slowdown in productivity growth from 2007 onwards.  Of the remaining shortfall, about 60% can be attributed to a smaller stock of capital and 40% to a smaller labor force (both relative to what they would have been had they continued on the same trend paths that they had followed before 2008).

Section B of this post will examine the labor force figures.  Section C will look at what has happened to investment and the resulting growth in available capital.  Section D will then examine the Cobb-Douglas model used to estimate the relative importance of labor and capital both growing more slowly than they had before and the impact of slower productivity growth.  Section E will conclude.

As noted above, labor growth has slowed due to demographic changes as population growth has slowed and as the population has aged.  A rising share of the population (specifically the Baby Boomers) have been moving into their normal retirement years, and this has led to a slower rate of growth in the labor force.  There is nothing wrong with this, it depends primarily on personal choices, and there is no real policy issue here.

In contrast, there are important policy issues to examine on why investment has fallen in recent decades – and especially since 2008 – with the resulting slower rate of capital accumulation as well as slower productivity growth.  But the causes of this are complex, and will not be examined here.  I hope to address them in a subsequent post on this blog.

[Note on the data:  In each chart, I used the most detailed data available for that particular data series, i.e. monthly when available (labor force statistics), quarterly (real GDP), or annual (capital accumulation). The data are current as of the date indicated for when they were downloaded, but some are subject to subsequent revision.]

B.  Growth in the Labor Force

Growth in the US labor force has slowed, but by how much, when did this start, and why?  We will examine this primarily through a series of charts.  Most of these charts will be shown with the vertical axis in logarithms.  As you may remember from your high school math, in such charts a straight line will reflect a constant rate of growth.  The slope of the lines will correspond to that rate of growth, with a steeper line indicating a faster rate of growth.

The trend lines in the charts here (including in the chart at the top of this post) have all been drawn based on what the trends appear to be (i.e. “by eyeball”) in the periods leading up to 2008.  They were not derived from some kind of statistical estimation, nor from a strict peak-to-peak connection, but rather were drawn based on what capacity appeared to be growing at over time.  They were also drawn independently for aggregate real GDP (Chart 1 above), for growth in the labor force (Chart 2 below) and for growth in net fixed assets (Chart 10 below).  Despite being independently drawn, we will see in Section D below that a very simple Cobb-Douglas model finds that they are consistent with each other to a surprising degree, in that the predicted GDP trend corresponds to and can be explained by the trends as drawn for labor and for capital.

Starting with the labor force:

Chart 2

The US labor force grew at a remarkably steady rate from the early 1980s up to 2008.  Prior to the 1980s, it grew at a faster pace (a trend line would be steeper) as women entered the labor force in large numbers and later as the Baby Boomers began to join the labor force in large numbers in the early 1970s.

But then that steady rise in the labor force (of about 1.3% per annum before 2008) decelerated sharply.  The growth rate fell to only 0.5% per year between 2007 and 2023.  Why?

We can start with overall population growth:

Chart 3

Population, too, had grown at a steady pace prior to 2008.  But population growth then slowed.  In this context, it is not surprising to see that growth in the labor force also slowed.

But there is more to it than just this.  Before 2008, the US population had been growing at a similar rate as the labor force, thus leading to a fairly constant share of the labor force in the population (generally in the range of 50 to 51%):

Chart 4

But then, in 2008, the share of the labor force in the US population fell.  Growth in the labor force slowed by more than growth in the US population.  What were the factors behind that?

One assertion that is often made is that labor force participation rates fell.  At an aggregate level this is, almost by definition, true.  As a share of the US adult population (those aged 16 and over), the labor force participation rate fell from 66.0% in 2007 to 62.6% in 2023 (using standard BLS figures).  But one can be misled by focusing on the aggregate participation rate.  The overall participation rate came down not because those in various age groups became less likely to join the labor force, but rather because an increasing share of the population was aging into their normal retirement years.

The BLS provides seasonally adjusted figures for the labor force broken into three age groups: those aged 16 to 24, those aged 25 to 54, and those aged 55 or more.  Labor force participation rates are provided for each of these three groups, and one can calculate what the labor force participation would have been for each had the participation rate always been at that of 2007:

Chart 5

The line in red shows what the labor force then would have been, with the line in blue showing the actual labor force and the line in black the trend (the same trend as in Chart 2 above).  While it would have made a significant difference before the 1980s (as women were not participating in the formal labor force to the same degree then), between 2008 and 2023 it makes very little difference.  The labor force would have still fallen by about the same figures relative to its previous trend.

Rather, the labor force has been aging, with a growing share of the population now in the normal retirement years when labor force participation rates are low.  From the BLS numbers, one can work out the share of the population that are age 55 or older:

Chart 6

The share in the population of those aged 55 or older started to turn sharply upward around 1998.  They thus would have been 65 or older starting around 2008.  And as noted before, this is also when the first of the Baby Boomers (those born in 1946) would have started to reach their normal retirement age.

[Side note:  The discontinuities that one sees at various points in this chart are there because of adjustments made by the BLS in their control totals.  They adjust these control totals once new results are available from the decennial US population censuses.  They need such control totals for the shares of the various demographic groups since the labor force estimates come from its Current Population Survey (CPS), and as with any survey, control totals are needed to generalize from the sample survey results.  But the BLS does not then revise prior CPS estimates once the control totals are updated with each decennial census.  That then leads to these discontinuities.  For our purposes here, those discontinuities are not important.]

Labor force growth thus slowed from 2008 onwards.  This can be explained by basic demographics with an aging population.  This was not due to less willingness to participate in the labor force – an assertion one often sees.  Holding participation rates constant at what they were in 2007 for just three broad age groups led to no significant difference in what the labor force would have been.  Rather, people are just aging into their normal retirement years.

C.  Growth in Capital

Labor works with machinery, equipment, structures, and other fixed assets – which together will be referred to as simply capital – to produce output.  Those assets also reflect the technology that was available and economic (in terms of cost) when they were installed.  Those assets are acquired by investment, and it is important to recognize that net investment has fallen sharply over the last several decades.

This is not often recognized, as most analysts and news reports focus not on net investment but rather on gross investment.  Gross investment figures are provided in the GDP accounts that are released each month, and gross investment as a share of GDP has not varied all that much.  The decade-long averages for gross private fixed investment have varied only between 16 and 18 1/2% of GDP since the 1960s.

But the accumulated stock of capital does not arise simply out of gross investment but rather out of investment net of depreciation – i.e. net investment.  Less attention is paid to net investment figures, and estimating depreciation is not easy.  It is certainly not depreciation as defined by tax law, as tax law as written reflects a deliberate attempt to encourage investment by allowing firms to declare depreciation to be greater than it actually is (e.g. through accelerated depreciation).  Assigning a higher cost to depreciation will reduce reported profit levels and hence reduce what needs to be paid in taxes on that profit income.

For the GDP accounts (NIPA accounts) the BEA needs to record what actual depreciation was, not what depreciation as allowed under the tax code may have been.  The BEA estimates of this are carefully done and are the best available.  However, one still needs to recognize that these are estimates and that there are both conceptual and data issues when estimates of depreciation are made.

Based on the BEA estimates in the NIPA accounts, both public and private net fixed investment levels – as shares of GDP – have fallen sharply since the 1960s:

Chart 7

There are significant year-to-year fluctuations in the shares – especially in the private investment figures – as investment varies significantly over the course of the business cycle.  It falls in recessions and increases when the economy recovers.  The trends may thus be more clearly seen using decade averages of the net investment shares:

Chart 8

Total public and private net fixed investment fell from over 10% of GDP in the 1960s (and almost as much in the 1950s) to just 4.2% of GDP in the period from 2009 to 2023 – a fall of close to 60%.  Total private net fixed investment fell from about 7% of GDP in the 1950s, 60s, and 70s, to just 3.4% since 2009 – a fall by half.  Public net fixed investment fell even more sharply:  from over 3% of GDP in the 1960s to just 0.8% of GDP in recent years – a reduction of three-quarters (in the figures before rounding).  It should be no surprise why public infrastructure is so embarrassingly poor in the US.

The chart also shows private net fixed investment broken down into the share for investment in residential assets (housing) and non-residential assets.  Much of the decline in private net fixed investment was driven by an especially sharp reduction in investment in housing. Still, private investment in assets other than housing has also been cut back substantially, with a reduction of over 40% compared to where it was in the 1980s.

Based on their net fixed investment estimates and other data, the BEA also provides estimates of how the accumulated stock of real fixed capital has changed over time, with those levels shown in terms of quantity indices.  The resulting rates of growth in accumulated capital (which the BEA refers to, more precisely, as the net stock of fixed assets) have declined sharply with the reductions in the net investment shares:

Chart 9

In the 1960s, the annual growth rates varied between 3.5% (for residential fixed assets) and 4.4% (for public fixed assets).  But in the period from 2009 to 2023 those growth rates had fallen to just 1.9% for private non-residential fixed assets, 1.1% for public fixed assets, 0.8% for residential fixed assets, and 1.3% for all fixed assets.  Such a slow rate of capital accumulation will not be supportive of robust growth.

The reductions in the growth rates were especially sharp following the 2008 crisis.  This led capital accumulation to fall well below the trend path that it had previously been on:

Chart 10

As was the case for growth in the labor force, there is again a substantial fall after 2008 in the growth of an important factor in production relative to its previous trend.  This time it is accumulated capital.  It should not be surprising that this slowdown in the growth of both available labor and capital would then be accompanied by a slowdown in the growth of GDP – all relative to their previous trends.  But an open question is how much of the close to 20% shortfall in GDP as of 2023 was due to labor, how much to capital, and how much to the productivity of labor working with the available capital?  This will be examined in the next section.

D.  Modeling GDP:  The Relative Importance of Labor, Capital, and Productivity to the Shortfall

Output (GDP) has fallen relative to the path it was on before – and a 20% shortfall is a lot – as have both the size of the labor force and of accumulated capital.  To estimate how much of the shortfall in GDP can be attributed to the shortfall of labor, how much to the shortfall of capital, and how much to a slowdown in the growth in productivity of that labor and capital, one needs a model.

For this analysis, I used the extremely simple but standard model of production called the Cobb-Douglas.  Its formulation is credited to Paul Douglas (an economist) and Charles Cobb (a mathematician) in 1927, although Douglas recognized and acknowledged that a number of economists before them had worked with a similar relationship.  While extremely simple, it allows us to arrive at an estimate of how much of the shortfall in GDP can be attributed to labor, how much to capital, and how much to a change in productivity growth.  Despite being simple, there was a good fit when the model was tested for its predictions of GDP against what GDP actually was historically.  There was also a very surprisingly good fit against whether the trend growth in GDP was close to what the model predicted based on the trend growth observed for labor and for capital.

The Cobb-Douglas production function is an equation that relates what output (real GDP) would be for given levels of labor and capital as inputs.  The following subsection will provide a brief overview of that equation and of the parameters used.  Those who prefer to avoid equations can skip over this section and go directly to subsection (b) below, where the model was tested via a comparison of the model’s predicted values for GDP to what GDP actually was, both year-by-year and in its trend.

a)  The Cobb-Douglas Equation and Parameters 

The Cobb-Douglas production function can be written as:

Y = A(1+r)tLβK1−β

where Y is real GDP, L is labor, K is capital as measured, r is a rate of growth for the increase in productivity over time (t), A is a scaling factor, and β is an exponent indicating how much output (Y) will increase for a given percentage increase in L as an input.  With constant returns to scale (which is generally assumed), the exponent for K will then be 1- β.  They will also match (under the assumptions of this model) the shares in national income of labor and capital, respectively.  In the NIPA accounts for 2023, the compensation of employees was 62% of national income.  All other income (e.g. basically various forms of profit) was 38% of national income.  I rounded these to just a 60 / 40 split, so β = 0.60 and 1-β = 0.40.

Productivity will grow over time.  That is, the output that can be generated for a given amount of labor and of capital will grow over time.  As technology changes and is reflected in the accumulated stock of capital, labor working with the available machinery and equipment will be able to produce more.  While the contribution of the growth in productivity can be incorporated into the Cobb-Douglas in various different ways, the simplest is to assume that it augments the combination of labor and capital together.  This growth in productivity can then also be referred to as the growth in Total Factor Productivity (TFP).

For the simulations here, I took the year 2007 (the last full year before the 2008 collapse) as the base period, and hence scaled the labor and capital inputs in proportion to what they were in 2007.  Thus they were both set to the value of 1.00 in 2007, and if they were then, say, 10% higher in some future year they would have a value of 1.10 in that year.  The scaling coefficient A would then be equal to real GDP in 2007 ($16,762.4 billion in terms of 2017 constant $).

Finally, the rate of TFP growth was set so that GDP as modeled would roughly track what the actual values for GDP were historically.  It turned out that an annual rate of growth in TFP of 1.20% worked well for the years leading up to 2007, with this then falling to 0.90% per year in the years following 2007 up to and including 2023.  I did not try to fine-tune this to any greater precision (i.e. I looked at annual TFP growth to the nearest 0.1% and not more finely, i.e. to 1.20% or 1.30% but not to 1.21%).  I also constrained the TFP growth to be at just one given rate for all of the years before 2007 (1.20%) and one rate after 2007 (0.90%), even though it is certainly conceivable that it could fluctuate over time.

b)  Comparison of GDP as Modeled by the Cobb-Douglas versus Actual and Trend GDP

The Cobb-Douglas just provides a model, and the first question to address is whether that model appears to track what we know about the economy.  There were two tests to look at:  1)  how well it tracked actual GDP as a function of actual labor employed and capital (net fixed assets), and 2)  how well the model tracked the trend line for GDP growth (as drawn in Chart 1 at the top of this post) as a function of the trend line as drawn for the labor force (Chart 2) and the trend line as drawn for capital (Chart 10).  Keep in mind that these trend lines were drawn independently and “by eyeball” based on what appeared to fit best in the decades leading up to 2008.

This chart shows how well the modeled GDP tracked actual historical GDP:

Chart 11

The line in black shows what actual real GDP was in each year from 1959 to 2023.  The line in red shows what the simple Cobb-Douglas model predicted real GDP would be in each year with the parameters as discussed above and with the labor input based on actual employment in that year rather than the available labor force.  The capital input is always available net fixed assets (as an index, which is all we need for the relative changes), as estimated by the BEA for the NIPA accounts (shown in Chart 10 above).

The line in red for the modeled GDP tracks well the line in black of actual GDP, especially from about the early 1980s onwards.  A reduction in the growth rate for TFP in the years prior to 1980 would have led it to track the earlier years better, but I did not want to try to “fine-tune” the TFP rate.  My main interest is in how well predicted GDP tracks actual GDP over the last several decades.  Over this period, a simple Cobb-Douglas with fixed parameters and with TFP growth of 1.20% for the years before 2007 and 0.90% in the years since, tracked quite well.  And this was over a period when GDP grew from just $7.3 trillion in 1980 (in 2017 constant $) to $22.7 trillion in 2023 – more than tripling.

A second test is whether something close to the GDP trend line (as drawn in Chart 1 at the top of this post) will be generated by the Cobb-Douglas model when the labor force grows on its trend line (as drawn in Chart 2) and capital grows on its trend line (as drawn in Chart 10).  Each of these trend lines were drawn independently and “by eyeball”.

The answer is that it does, and to an astonishing degree.  This may have been the case in part by luck or coincidence, but regardless, was extremely close.  The line for GDP as predicted from the Cobb-Douglas model using labor and capital inputs that each followed their own trend lines, was so close to the GDP trend line that they were on top of each other in the chart and could not be distinguished.

One should keep in mind that, by construction, the predicted GDP in 2007 from the Cobb-Douglas model will be equal to actual GDP in that year.  The scaling factor was set that way.  But the question being examined is whether the predicted GDP (based on the labor and capital trend lines) would drift away from the trend line for GDP (as drawn) over time.  It did not.  Calculating it back over a 60-year period (i.e. equivalent to going back to 1947 from the 2007 base), the predicted GDP was only 0.7% greater than what GDP on the drawn trend line would have been 60 years before.

This is tiny, and indeed so tiny that I at first thought it might be a mistake.  But after simulating what would have been generated by various alternative parameters for the Cobb-Douglas, as well as alternative trend paths for labor and capital, the calculations were confirmed.  The implication is that the trend lines for GDP, labor, and capital – while independently drawn – are consistent with each other and with this simple Cobb-Douglas framework.

The rate of productivity growth – TFP growth – for the years leading up to 2007 was 1.20%.  It was derived, as noted above, by trying various alternatives and seeing which appeared to fit best with the figures for actual GDP in those years.  Going forward from 2007, however, it would have over-predicted what GDP would have been.  What fit well with the data on actual GDP (and based on actual employment and available net fixed assets) was a reduction in the TFP rate from the 1.20% used for the years up to 2007 to a rate of 0.90% for the years after.

The resulting path for actual GDP versus the path as modeled by the Cobb-Douglas can be more clearly seen in the following chart.  It is the same as Chart 11, but now only for the period from 2000 to 2023:

Chart 12

The red line shows the path for the simulated GDP, where from 2007 onwards the assumed TFP growth rate was 0.90%.  The fit is very good, and especially in 2022 and 2023 – the years of most interest to us – when the simulated GDP (from the Cobb-Douglas) is almost identical to actual GDP.  These are both well below the path (the green line) that would have been followed based on the previous trend growth in labor and capital, as well as the continuation of productivity growth at a 1.20% rate rather than falling to 0.90%.

c)  The Causes of the Below Trend Growth of GDP Since 2008

From this simple Cobb-Douglas model, we can try various simulations of what growth in GDP might have been had the labor force continued to grow at the rate it had before 2008, had capital continued to grow at the rate it had before 2008, and had productivity (TFP) continued to grow at the rate it had before 2008.

The results are shown in the following chart:

Chart 13

The resulting paths for GDP are shown as a ratio to what actual GDP was in each year, with the differences expressed in percentage points.  By definition, there will be no difference for actual GDP, so it is a flat line (in black) with a zero difference in each year.  The line in red then shows what the modeled GDP was in each year in terms of the percentage point difference with actual GDP, using actual labor employed in each year and available capital.  The red line shows at most a 2 percentage point difference with actual GDP – and no difference at all in 2022 and 2023.  The model tracks actual GDP well when the labor input is equal to observed employment.

The line in blue then shows what GDP would have been (according to the model) had capital growth continued after 2007 along its pre-2008 trend path (the path drawn in Chart 10 above) while labor grew at the actual rate of employment.  It shows how much the shortfall in GDP was as a consequence of capital accumulation slowing down from 2008 onwards.  As seen in the chart, the impact of this slowdown has grown over time.

The line in orange shows what GDP would have been had labor growth continued after 2007 on its pre-2008 trend path (the path drawn in Chart 2 above), while capital grew not along its trend but rather as measured.  Here one needs to take into account that the growth rate of actual employment and the growth rate of the labor force will only match between periods when the unemployment rate was the same.  Thus comparisons should be limited to periods when the economy was close to full employment, such as between 2007 (when unemployment averaged 4.6%), 2016 to 2019 (annual unemployment rates of 4.9% to 3.7%), and 2022/23 (annual unemployment rates of 3.6%).  That is, the “peaks” seen in the orange line in 2009 and again in 2020 are not significant, as they reflect labor not being fully used.  This was not because the labor force was not available but rather due to the disruptions of the downturns in those years.

The line in burgundy then shows what GDP would have been (in terms of its percentage point difference with actual GDP) had both labor and capital inputs continued to grow (and been used) on their pre-2008 trend paths.  Note that the values here will not be the simple addition of the percentage point contributions of the slower than trend growth of the labor force and the slower than trend growth of capital.  The Cobb-Douglas relationship is a multiplicative one, not a linear one.  But if one does multiply out the two (the blue and orange lines, but as ratios rather than percentage points), and adjust for the model’s tracking error (the red line), one will get the impact of the two together (the burgundy line).

Finally, there is the impact of the slowdown in TFP growth from 1.20% per year before 2007 to 0.90% after.  That will appear as the difference between what GDP would have been had it followed the previous trend path (the green line in the chart) and the impact of labor and capital both slowing down from their respective trends (the burgundy line).  Its impact grows steadily larger over time.

Based on these simulations, as of 2023 approximately 25% of the shortfall in GDP relative to what it would have been had it continued on its pre-2008 trend can be attributed to a fall in the rate of productivity growth (TFP) from 1.20% to 0.90%.  Of the remaining shortfall, approximately 60% was due to the slowdown in investment and hence capital accumulation, and approximately 40% was due to the slowdown in the growth of the labor force.  Or put another way (and keeping in mind that the impacts are not linearly additive, but only approximately so), of the total shortfall in 2023, about 70% was due to the slowdown in productivity growth together with the related slowdown in capital growth, and about 30% was due to the slowdown in labor force growth.

But these figures are for 2023 and will shift over time.  Going forward, and unless something is done to change things, the shortfall in GDP (its deviation from the pre-2008 trend) will be widening, and the shortfall in capital accumulation (due to the fall in investment as a share of GDP) plus the related reduction in productivity growth, can be expected to account for an increasing share of this increasing shortfall in GDP.  These already accounted for about 70% of the shortfall in 2023, and on current patterns that share will grow in the coming years.

E.  Conclusion

GDP fell sharply in the economic and financial collapse that began in the second half of 2008.  But while there was a recovery, with employment eventually returning to full employment levels, GDP never returned to the path it had previously been on.  This was new.  In prior recessions (as seen in Chart 1 at the top of this post), GDP was back close to its earlier path once employment had recovered to full employment levels.  As a consequence, by 2023 GDP would have been close to 20% higher than what it was had GDP returned to its previous path.  And 20% higher GDP is huge.  In terms of current GDP in current prices, that is close to $6 trillion of increased output and incomes each year.  Total federal government spending on everything is about $7 trillion currently.

The proximate causes of this can be broken down into three.  First, the labor force began to grow at a slower rate in the years following 2008.  This was not due to labor force participation rates falling for individual age groups.  Rather, this in part reflected a slowdown in the growth of the overall US population (and to this extent, will then be offset when GDP is looked at in per capita terms).  But in addition, there was the impact of an aging population, with the Baby Boom generation entering into their normal retirement years.

In policy terms, there is not much one can or should want to do about labor force growth.  Population growth is what it is, and an aging population will see an increasing share of the population moving into their retirement years.  These all reflect personal choices.

In contrast, the slowdown in investment and the resulting slowdown in capital accumulation and productivity growth is a policy question that merits a careful review.  Why are firms investing less now than they did before?  Profits (especially after-tax profits) are at record highs and the stock market is booming.  In a market economy where firms are avidly competing with each other, this should have led to an increase – not a decrease – in net investment.

A future post in this series will examine the factors behind this.  But first, a post will examine the specific case of residential investment.  Net residential investment fell especially sharply after 2008 (see Charts 8 and 9 above), while home prices have shot up.  Housing is important, and its rising cost has been the source of much displeasure in recent years by those who do not own a home and must rent.  The rising cost of housing is the primary (indeed, the only) reason why the CPI inflation index remains above the Fed’s target of 2%.  It merits its own review.

Why Voters Are Upset: The Underperformance of the US Economy Since the 2008 Crash

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A clear message from the November 5 election is that voters are upset with their economic circumstances.  Much of the focus has, not surprisingly, been on the comparison households feel relative to 2020, when Trump was president.  But 2020 was a special year.  While the economy collapsed with the lockdowns, massive federal relief programs (first proposed by Nancy Pelosi and the Democrats in Congress, and later welcomed and signed into law by Trump) sustained and indeed added to household disposable income levels.  With expenditures restrained due to the Covid pandemic, household savings and bank account balances rose.  They were then spent down in the following years.  A post on this blog from December 2022 estimated the excess savings balances would likely be used up by 2024 – the election year – at which time households would be in a bind.  And that appears to be precisely what happened.  An analysis by JPMorganChase of the bank accounts of 7.8 million of its customers found that bank balances – which had risen to more than 60% above normal levels in 2020-21 – had by 2024 fallen to below what would have been expected based on historical patterns.

But the economy has not been doing well for some time.  Using up and then going beyond what had been saved in 2020-21 needs to be explained by more than households making use of those excess balances.  Rather, households have grown increasingly anxious about not being able to sustain a standard of living that they had expected they would be able to enjoy.  That anxiety needs to be examined in a longer-term context.

The chart at the top of this post suggests what might be underlying this.  Both per capita real GDP and per capita real Personal Consumption Expenditures (PCE) grew at a remarkably steady pace from 1950 for per capita real GDP and back even further to around 1936 for per capita real PCE.  Note that the chart is shown with the vertical scale in logs, and hence a constant rate of growth will be a straight line.  The trend lines shown (in black) are then drawn so that they go roughly from peak to peak, although with a small excess sometimes allowed.

Growth in per capita GDP and PCE were both remarkably close to those trends – up until 2008, that is.  Both GDP and PCE then fell in the economic and financial collapse in that last year of the Bush administration, with this continuing into 2009.  They then stabilized and began to grow again.  But unlike in prior downturns stretching back to 1936, the economy did not return to its previous path.  Rather, it remained below.  A gap opened up and has remained.  Indeed, the gap has grown.

This can be seen more clearly in the same chart but for the period of 2000 to 2023 only:

The trend lines are the same as drawn before.  By 2023, real GDP (in 2017 prices) was $67,600 per person, but would have been $81,300 per person had the economy continued on the previous trend path.  Real Personal Consumption Expenditures per person was $46,600 in 2023, but would have been $55,700 had it kept on the previous path.  These differences are not small.  Personal consumption would have been more than $9,000 higher per person (in 2017 prices), or more than $36,000 higher for a family of four.  In terms of 2023 prices, personal consumption would have been close to $11,000 higher per person, or $44,000 higher for a family of four.  Economic growth matters, it compounds over time, and when it slows, the impacts can soon be huge.

The figures can also be presented in percentage terms, where the following chart shows the ratio of per capita real GDP and real PCE on the trend compared to what they actually were in each year:

There were relatively modest fluctuations around the trend as drawn up until 2008.  But then one sees a bulge – far larger than anything seen before – that has been sustained and shows no sign of returning to the trend path.  By 2023, both per capita GDP and per capita Personal Consumption Expenditures would have been 20% higher had the economy remained on (or had returned to) the previous trends going back to 1950 for per capita GDP and 1936 for per capita PCE.  That is a huge difference.

It is also worth noting that not only has the economy not returned to the previous trend path, but – while still early, with a limited number of years – the growth rate of per capita real GDP has slowed.  On the prior trend path from 1950, per capita real GDP grew at an annual rate of 2.15%.  GDP then fell in 2008/2009 before stabilizing under Obama and then starting to grow.  From the start of Obama’s second term (2013) through to 2023, per capita real GDP grew at an annual rate of 1.87% (with similar rates under Obama, Biden, and Trump if one excludes the collapse in Trump’s fourth year in office).  That is, growth in real GDP has slowed by about 0.3% per annum, and hence one sees in the chart above that real GDP on the trend path was about 17% above the actual in 2013 and is now 20% above the actual.

Growth in per capita real Personal Consumption Expenditures, in contrast, has not slowed as much.  On the trend path it grew at a rate of 2.3% per year, while from 2013 to 2023 it grew at almost the same rate of 2.2% per year.  That is, households have sought to sustain their previous growth in consumption expenditures.  But with GDP (and hence incomes) not growing as fast, this has become increasingly difficult.

Finally, it should be noted that these figures on per capita GDP and per capita PCE are averages, and do not take into account distributional changes.  But as was shown in previous posts on this blog, the distribution of incomes became dramatically worse since about 1980 – when Reagan was elected – while wages have stagnated.  Richer households have been doing better, and hence relative to the averages, poorer households have been doing worse.

Voters therefore have good reason to be upset.  The economy never fully recovered from the 2008 collapse, and while growth resumed, the rate of growth has been somewhat less than what the country had before.  Households have tried to sustain the previous growth in personal consumption, but that has become increasingly difficult in the face of a slower pace of GDP growth.

The critical question is, of course, why did the economy never recover in full from the 2008 collapse.  I hope to address that in a future blog post.  The purpose of this one has been simply to present that there is an issue.  Note also that there may be multiple reasons for the lack of a full recovery.  The underlying factors can be additive, and together account for an economic performance that falls short of what had previously been expected.

Trump’s Economic Record in Charts

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A.  Introduction

Donald Trump has repeatedly asserted that he built “the greatest economy in history”.  A recent example is in his acceptance speech for the Republican nomination to run for a second term.  And it is not a surprise that Trump would want to claim this.  It would be nice, if true.  But what is surprising is that a number of election surveys have found that Trump polls well on economic issues, with voters rating Trump substantially above Biden on who would manage the economy better.

Yet any examination of Trump’s actual record, not just now following the unprecedented economic collapse this year resulting from the Covid-19 crisis, but also before, shows Trump’s repeated assertion to be plainly false.

The best that can be said is that Trump did not derail, in his first three years in office, the economic expansion that began with the turnaround Obama engineered within a half year of his taking office in 2009 (when Obama had inherited an economy that was, indeed, collapsing).  But the expansion that began under Obama has now been fully and spectacularly undone in Trump’s fourth year in office, with real GDP in the second quarter of 2020 plummeting at an annualized rate of 32% – to a level that is now even well below what it was when Trump took office.  The 32% rate of decline is by far the fastest decline recorded for the US since quarterly data on GDP began to be recorded in 1947 (the previous record was 10%, under Eisenhower, and the next worst was an 8.4% rate of decline in the last quarter of 2008 at the very end of the Bush administration.

This post will look at Trump’s record in comparison to that not just of Obama but also of all US presidents of the last almost 48 years (since the Nixon/Ford term).  For his first three years in office, that Trump record is nothing special.  It is certainly and obviously not the best in history.  And now in his fourth year in office, it is spectacularly bad.

The examination will be via a series of charts.  The discussion of each will be kept limited, but the interested reader may wish to study them more closely – there is a lot to the story of how the economy developed during each presidential administration.  But the primary objective of these “spaghetti” charts is to show how Trump’s record in his first three years in office fits squarely in the middle of what the presidents of the last half-century have achieved.  It was not the best nor the worst over those first three years – Trump inherited from Obama an expanding and stable economy.  But then in Trump’s fourth year, it has turned catastrophic.

Also, while there is a lot more that could be covered, the post will be limited to examination of the outcomes for growth in overall output (GDP), for the fiscal accounts (government spending, the fiscal deficit, and the resulting public debt), the labor market (employment, unemployment, productivity, and real wages), and the basic trade accounts (imports, exports, and the trade balance).

The figures for the charts were calculated based on data from a number of official US government sources.  Summarizing them all here for convenience (with their links):

a)  BEA:  Bureau of Economic Analysis of the US Department of Commerce, and in particular the National Income and Product Accounts (NIPA, also commonly referred to as the GDP accounts).

b)  BLS:  Bureau of Labor Statistics of the US Department of Labor.

c)  OMB Historical Tables:  Office of Management and Budget, of the White House.

d)  Census Bureau – Foreign Trade Data:  Of the US Department of Commerce.

It was generally most convenient to access the data via FRED, the Federal Reserve Economic Database of the St. Louis Fed.

B.  Real GDP

Trump likes to assert that he inherited an economy that was in terrible shape.  Larry Kudlow, the director of the National Economic Council and Trump’s principal economic advisor recently asserted, for example in his speech to the Republican National Convention, that the Trump administration inherited from Obama “a stagnant economy that was on the front end of a recession”.  While it is not fully clear what a “front end” of a recession is (it is not an economic term), the economy certainly was not stagnant and there was no indication whatsoever of a recession on the horizon.

The chart at the top of this post shows the path followed by real GDP during the course of Obama’s first and second terms in office, along with that of Trump’s term in office thus far.  Both are indexed to 100 in the first calendar quarter of their presidential terms.  Obama inherited from Bush an economy that was rapidly collapsing (with a banking system in ruin) and succeeded in turning it around within a half year of taking office.  Subsequent growth during the remainder of Obama’s first term was then similar to what it was in his second term (with the curve parallel but shifted down in the first term due to the initial downturn).

Growth in the first three years of Trump’s presidency was then almost exactly the same as during Obama’s second term.  There is a bit of a dip at the start of the second year in Obama’s second term (linked to cuts in government spending in the first year of Obama’s second term – see below), but then a full recovery back to the previous path.  At the three-year mark (the 12th quarter) they are almost exactly the same.  To term this stagnation under Obama and then a boom under Trump, as Kudlow asserted, is nonsensical – they are the same to that point.  But the economy has now clearly collapsed under Trump, while it continued on the same path as before under Obama.

Does Trump look better when examined in a broader context, using the record of presidents going back to the Nixon/Ford term that began almost 48 years ago?  No:

The best that can be said is that the growth of real GDP under Trump in his first three years in office is roughly in the middle of the pack.  Growth was worse in a few administrations – primarily those where the economy went into a recession not long after they took office (such as in the first Reagan term, the first Bush Jr. term, and the Nixon/Ford term).  But growth in most of the presidential terms was either similar or distinctly better than what we had under Trump in his first three years.

And now real GDP has collapsed in Trump’s fourth year to the absolute worst, and by a very significant margin.

One can speculate on what will happen to real GDP in the final two quarters of Trump’s presidency.  Far quicker than in earlier economic downturns, Congress responded in March and April with a series of relief bills to address the costs of the Covid-19 crisis, that in total amount to be spent far surpass anything that has ever been done before.  The Congressional Budget Office (CBO) estimates that the resulting spending increases, tax cuts, and new loan facilities of measures already approved will cost a total of $3.1 trillion.  This total approved would, by itself, come to 15% of GDP (where one should note that not all will be spent or used in tax cuts in the current fiscal year – some will carry over into future years).  Such spending can be compared to the $1.2 trillion, or 8.5% of the then GDP, approved in 2008/09 in response to that downturn (with most of the spending and tax cuts spread over three years).  Of this $1.2 trillion, $444 billion was spent under the TARP program approved under Bush and $787 billion for the Recovery Act under Obama).

And debate is currently underway on additional relief measures, where the Democratic-controlled Congress approved in May a further $3 trillion for relief, while leaders in the Republican-controlled Senate have discussed a possible $1 trillion measure.  What will happen now is not clear.  Some compromise in the middle may be possible, or nothing may be passed.

But the spending already approved will have a major stimulative effect.  With such a massive program supporting demand, plus the peculiar nature of the downturn (where many businesses and other centers of employment had to be temporarily closed as the measures taken by the Trump administration to limit the spread of the coronavirus proved to be far from adequate), the current expectation is that there will be a significant bounceback in GDP in the third quarter.  As I write this, the GDPNow model of the Atlanta Fed forecasts that real GDP in the quarter may grow at an annualized rate of 29.6%.  Keep in mind, however, that to make up for a fall of 32% one needs, by simple arithmetic, an increase of 47% from the now lower base.  (Remember that to make up for a fall of 50%, output would need to double – grow by 100% – to return to where one was before.)

Taking into account where the economy is now (where there was already a 5% annualized rate of decline in real GDP in the first quarter of this year), what would growth need to be to keep Trump’s record from being the worst of any president of at least the last half-century?  Assuming that growth in the third quarter does come to 29.6%, one can calculate that GDP would then need to grow by 5.0% (annualized) in the fourth quarter to match the currently worst record – of Bush Jr. in his second term.  And it would need to grow by 19% to get it back to where GDP was at the end of 2019.

C.  The Fiscal Accounts

Growth depends on many factors, only some of which are controlled by a president together with congress.  One such factor is government spending.  Cuts in government spending, particularly when unemployment is significant and businesses cannot sell all that they could and would produce due to a lack of overall demand, can lead to slower growth.  Do cuts in government spending perhaps explain the middling rate of growth observed in the first three years of Trump’s term in office?  Or did big increases in government spending spur growth under Obama?

Actually, quite the opposite:

Federal government spending on goods and services did rise in the first year and a half of Obama’s first term in office, with this critical in reversing the collapsing economy that Obama inherited.  But the Republican Congress elected in 2010 then forced through cuts in spending, with further cuts continuing until well into Obama’s second term (after which spending remained largely flat).  While the economy continued to expand at a modest pace, the cuts slowed the economy during a period when unemployment was still high.  (There is also government spending on transfers, where the two largest such programs are Social Security and Medicare, but spending on such programs depends on eligibility, not on annual appropriations.)

Under Trump, in contrast, government spending has grown, and consistently so.  And indeed government spending grew under Trump at a faster pace than it had almost any other president of the last half-century (with even faster growth only under Reagan and Bush, Jr., two presidents that spoke of themselves, as Trump has, as “small government conservatives”):

The acceleration in government spending growth under Trump did succeed, in his first three years in office, in applying additional pressure on the economy in a standard Keynesian fashion, which brought down unemployment (see below).  But this extra government spending did not lead to an acceleration in growth – it just kept it growing (in the first three years of Trump’s term) at the same pace as it had before, as was seen above.  That is, the economy required additional demand pressure to offset measures the Trump administration was taking which themselves would have reduced growth (such as his trade wars, or favoritism for industries such as steel and aluminum, which harmed the purchasers of steel and aluminum such as car companies and appliance makers).

Trump has also claimed credit for a major tax cut bill (as have Reagan and Bush, Jr.).  They all claimed this would spur growth (none did – see above and a more detailed analysis in this blog post), and indeed such sufficiently faster growth, they predicted, that tax revenue would increase despite the reductions in the tax rates.  Hence fiscal deficits would be reduced.  They weren’t:

Fiscal deficits were large and sustained throughout the Reagan/Bush Sr. years.  They then moved to a fiscal surplus under Clinton, following the major tax increase passed in 1993 and the subsequent years of steady and strong growth.  The surplus was then turned back again into a deficit under Bush Jr., with his major tax cuts of 2001 and 2003 coupled with his poor record for economic growth.  Obama then inherited a high fiscal deficit, which grew higher due to the economic downturn he faced on taking office and the measures that were necessary to address it.  But with the economic recovery, the deficit under Obama was then reduced (although at too fast a pace –  this held back the economy, especially in the early years of the recovery when unemployment was still high).

Under Trump, in contrast, the fiscal deficit rose in his first three years in office, at a time when unemployment was low.  This was the time when the US should have been strengthening rather than weakening the fiscal accounts.  As President Kennedy said in his 1962 State of the Union Address: “The time to repair the roof is when the sun is shining.”  Under Trump, in contrast, the fiscal deficit was reaching 5% of GDP even before the Covid-19 crisis.  The US has never before had such a high fiscal deficit when unemployment was low, with the sole exception of during World War II.

This left the fiscal accounts in a weak condition when government spending needed to increase with the onset of the Covid-19 crisis.  The result is that the fiscal deficit is expected to reach an unprecedented 16% of GDP this fiscal year, the highest it has ever been (other than during World War II) since at least 1930, when such records began to be kept.

The consequence is a public debt that is now shooting upwards:

As a share of GDP, federal government debt (held by the public) is expected to reach 100% of GDP by September 30 (the end of the fiscal year), based on a simple extrapolation of fiscal account and debt data currently available through July (see the US Treasury Monthly Statement for July, released August 12, 2020).  And with its momentum (as such fiscal deficits do not turn into surpluses in any short period of time), Trump will have left for coming generations a government debt that is the highest (as a share of GDP) it has ever been in US history, exceeding even what it was at the end of World War II.

When Trump campaigned for the presidency in 2016, he asserted he would balance the federal government fiscal accounts “fairly quickly”.  Instead the US will face this year, in the fourth year of his term in office, a fiscal deficit that is higher as a share of GDP than it ever was other than during World War II.  Trump also claimed that he would have the entire federal debt repaid within eight years.  This was always nonsense and reflected a basic lack of understanding.  But at least the federal debt to GDP ratio might have been put on a downward trajectory during years when unemployment was relatively low.  Instead, federal debt is on a trajectory that will soon bring it to the highest it has ever been.

D.  The Labor Market

Trump also likes to assert that he can be credited with the strongest growth in jobs in history.  That is simply not true:

Employment growth was higher in Obama’s second term than it ever was during Trump’s term in office.  The paths were broadly similar over the first three years of Trump’s term, but Trump was simply – and consistently – slower.  In Obama’s first term, employment was falling rapidly (by 800,000 jobs a month) when Obama took his oath of office, but once this was turned around the path showed a similar steady rise.

Employment then plummeted in Trump’s fourth year, and by a level that was unprecedented (at least since such statistics began to be gathered in 1947).  In part due to the truly gigantic relief bills passed by Congress in March and April (described above), there has now been a substantial bounceback.  But employment is still (as of August 2020) well below what it was when Trump took office in January 2017.

Even setting aside the collapse in employment this year, Trump’s record in his first three years does not compare favorably to that of other presidents:

A few presidents have done worse, primarily those who faced an economy going into a downturn as they took office (Obama) or where the economy was pushed into a downturn soon after they took office (Bush Jr., Reagan) or later in their term (Bush Sr., Nixon/Ford).  But the record of other presidents was significantly better, with the best (which some might find surprising) that of Carter.

Trump also claims credit for pushing unemployment down to record low levels.  The unemployment rate did, indeed, come down (although not to record low rates – the unemployment rate was lower in the early 1950s under Truman and then Eisenhower, and again in the late 1960s).  But one cannot see any significant change in the path on the day Trump was inaugurated compared to what it had been under Obama since 2010:

And of course now in 2020, unemployment has shot upwards to a record level (since at least 1948, when these records began to be kept systematically).  It has now come down with the bounceback of the economy, but remains high (8.4% as of August).

Over the long term, nothing is more important in raising living standards than higher productivity.  And this was the argument Trump and the Republicans in Congress made to rationalize their sharp cuts in corporate tax rates in the December 2017 tax bill.  The argument was that companies would then invest more in the capital assets that raise productivity (basically structures and equipment).  But this did not happen.  Even before the collapse this year, private non-residential investment in structures and equipment was no higher, and indeed a bit lower, as a share of GDP than what it was before the 2017 tax bill passed.

And it certainly has not led to a jump in productivity:

Productivity growth during Trump’s term in office has been substantially lower (by 3%) than what it was during Obama’s first term, although somewhat better than during Obama’s second term (by a cumulative 1% point at the same calendar quarter in their respective terms).

And compared to that of other presidents, Trump’s record on productivity gains is nothing special:

Finally, what happened to real wages?  While higher productivity growth is necessary in the long term for higher wages (workers cannot ultimately be paid more than what is produced), in the short term a number of other factors (such as relative bargaining strength) will dominate.  When unemployment is high, wage gains will typically be low as firms can hire others if a worker demands a higher wage.  And when unemployment is low, workers will typically be in a better bargaining position to demand higher wages.

How, then, does Trump’s record compare to that of Obama?:

During the first three years of Trump’s tenure in office, real wage gains were basically right in the middle of what they were over the similar periods in Obama’s two terms.  But then it looks like real wages shot upwards at precisely the time when the Covid-19 crisis hit.  How could this be?

One needs to look at what lies behind the numbers.  With the onset of the Covid-19 crisis, unemployment shot up to the highest it has been since the Great Depression.  But two issues were then important.  One is that when workers are laid off, it is usually the least senior, least experienced, workers who are laid off first.  And such workers will in general have a lower wage.  If a high share of lower-wage workers become unemployed, then the average wage of the workers who remain employed will go up.  This is a compositional effect.  No individual worker may have seen an increase in his or her wage, but the overall average will go up if fewer lower-wage workers remain employed.

Second, this downturn was different from others in that a high share of the jobs lost were precisely in low-wage jobs – workers in restaurants, cafeterias, and hotels, or in retail shops, or janitors for office buildings, and so on.  As the economy shut down, these particular businesses had to close.  Many, if not most, office workers could work from home, but not these, commonly low-wage, workers.  They were laid off.

The sharp jump in average real wages in the second quarter of 2020 (Trump’s 14th quarter in office) is therefore not something to be pleased about.  As the lower-wage workers who have lost their jobs return to being employed, one should expect this overall average wage to fall back towards where it was before.

But the path of real wages in the first three years of Trump’s presidency, when the economy continued to expand as it had under Obama, does provide a record that can be compared.  How does it look relative to that of other presidents of the last half-century?:

Again, Trump’s record over this period is in the middle of the range found for other presidents.  It was fairly good (unemployment was low, which as noted above would be expected to help), but real wages in the second terms of Clinton and Obama rose by more, and performance was similar in Reagan’s second term.

E.  International Trade Accounts

Finally, how does Trump’s record on international trade compare to that of other presidents?  Trump claimed he would slash the US trade deficit, seeing it in a mercantilistic way as if a trade deficit is a “loss” to the country.  At a 2018 press conference (following a G-7 summit in Canada), he said, for example, “Last year,… [the US] lost  … $817 billion on trade.  That’s ridiculous and it’s unacceptable.”  And “We’re like the piggybank that everybody is robbing.”

This view on the trade balance reflects a fundamental lack of understanding of basic economics.  Equally worrisome is Trump’s view that launching trade wars targeting specific goods (such as steel and aluminum) or specific countries (such as China) will lead to a reduction in the trade deficit.  As was discussed in an earlier post on this blog, the trade balance ultimately depends on the overall balance between domestic savings and domestic investment in an economy.  Trade wars may lead to reductions in imports, but then there will also be a reduction in exports.  If the trade wars do not lead to higher savings or lower investment, such trade interventions (with tariffs or quotas imposed by fiat) will simply shift the trade to other goods or other nations, leaving the overall balance where it would have been based on the savings/investment balance.

But we now have three and a half years of the Trump administration, and can see what his trade wars have led to.  In terms of imports and exports:

Imports did not go down under Trump – they rose until collapsing in the worldwide downturn of 2020.  Exports also at first rose, but more slowly than imports, and then leveled off before imports did.  They then also collapsed in 2020.  Going back a bit, both imports and exports had gone up sharply during the Bush administration.  Then, after the disruption surrounding the economic collapse of 2008/9 (with a fall then a recovery), they roughly stabilized at high levels during the last five years of the Obama administration.

In terms of the overall trade balance:

The trade deficit more than doubled during Bush’s term in office.  While both imports and exports rose (as was seen above), imports rose by more.  The cause of this was the housing credit bubble of the period, which allowed households to borrow against home equity (which in turn drove house prices even higher) and spend that borrowing (leading to higher consumption as a share of current income, which means lower savings).  This ended, and ended abruptly, with the 2008/9 collapse, and the trade deficit was cut in half.  After some fluctuation, it then stabilized in Obama’s second term.

Under Trump, in contrast, the trade deficit grew compared to where it was under Obama.  It did not diminish, as Trump insisted his trade wars would achieve, but the opposite.  And with the growing fiscal deficit (as discussed above) due to the December 2017 tax cuts and the more rapid growth in government spending (where a government deficit is dis-saving that has to be funded by borrowing), this deterioration in the trade balance should not be a surprise.  And I also suspect that Trump does not have a clue as to why this has happened (nor an economic advisor willing to explain it to him).

F.  Conclusion

There is much more to Trump’s economic policies that could have been covered.  It is also not yet clear how much damage has been done to the economic structure from the crisis following the mismanagement of Covid-19 (with the early testing failures, the lack of serious contact tracing and isolation of those who may be sick, and importantly, Trump’s politicizing the wearing of simple masks).  Unemployment rose to record levels, and this can have a negative impact (both immediate and longer-term) on the productivity of those workers and on their subsequent earnings.  There has also been a jump in bankruptcies, which reduces competition.  And bankrupt firms, as well as stressed firms more generally, will not be able to repay their loans in full.  The consequent weakening of bank balance sheets will constrain how much banks will be able to lend to others, which will slow the pace of any recovery.

But these impacts are still uncertain.  The focus of this post has been on what we already know of Trump’s economic record.  It is not a good one. The best that can be said is that during his first three years in office he did not derail the expansion that had begun under Obama.  Growth continued (in GDP, employment, productivity, wages), at rates similar to what they were before.  Compared to paths followed in other presidencies of the last half-century, they were not special.

But this growth during Trump’s tenure in office was only achieved with rapid growth in federal government spending.  Together with the December 2017 tax cuts, this led to a growing, not a diminishing, fiscal deficit.  The deficit grew to close to 5% of GDP, which was indeed special:  Never before in US history has the fiscal deficit been so high in an economy at or close to full employment, with the sole exception of during World War II.

The result was a growing public debt as a share of GDP, when prudent fiscal policy would have been the reverse.  Times of low unemployment are when the country should be reducing its fiscal deficit so that the public debt to GDP ratio will fall.  Reducing public dis-saving would also lead to a reduction in the trade deficit (other things being equal).  But instead the trade deficit has grown.

As a consequence, when a crisis hits (as it did in 2020) and government needs to spend substantial sums for relief (as it had to this year), the public debt to GDP ratio will shoot upwards from already high levels.  Republicans in Congress asserted in 2011 that a public debt of 70% of GDP was excessive and needed to be brought down rapidly.  Thus they forced through spending cuts, which slowed the recovery at a time when unemployment was still high.

But now public debt under Trump will soon be over 100% of GDP.  Part of the legacy of Trump’s term in office, for whoever takes office this coming January 20, will therefore be a public debt that will soon be at a record high level, exceeding even that at the end of World War II.

This has certainly not been “the greatest economy in history”.