Gross domestic product, or GDP, is the measure of choice when assessing the health of any economy, especially in the United States. GDP, which is measured at annual rates, includes the value of production of all goods and services produced in a country. In the one year since President TrumpDonald John TrumpHHS official who spread Pizzagate conspiracy theory out at agency Washington Posts asks for help identifying Trump’s golf partners Prankster puts Putin portrait in Colorado Capitol where Trump’s portrait would be MORE took office, the first quarter of 2017 through the first quarter of 2018, real GDP grew at a 2.55 percent annual rate. This is higher than the growth for six of the eight years former President Obama was in office, or even five of the eight years when former President George W. Bush was in office.
Moreover, the economic growth rate in the first year of Trump in office is higher than the average annual growth rate for the entire presidencies of both Obama at 2.05 percent and Bush at 1.71 percent. For the full 65 years from the first quarter of 1953 through the first quarter of 2018, annual real GDP growth in the United States averaged 2.95 percent, which is still substantially higher than the first year under Trump.
The growth rate for the second quarter of 2018 is 4.1 percent. This is a nice sign of American prosperity and is the strongest quarter of economic growth since the third quarter of 2014. Net exports contributed about 1 percent, while the change in private inventories subtracted 1 percent. Lots of changes like this happen on a quarter by quarter basis and should not be taken too seriously.
The Commerce Department releases its quarterly estimates, but it has also revised a lot of historical numbers, although usually by only very small amounts. Perhaps its biggest revision was for the first four quarters of the Trump presidency. What had been an estimated annual growth of 2.82 percent was revised down to 2.55 percent, even though the first quarter of 2018 itself was revised up from 2 percent to 2.2 percent. This example is only meant to show the fragility of these numbers.
While the GDP growth of any one quarter can be offset, revised or magnified in subsequent quarters, a pattern appears to be emerging under the stewardship of the Trump administration, which makes a lot of sense, at least to me. I believe that people individually, and the economy collectively, respond strongly to economic incentives.
Other economists do not concur on this point. Jason FurmanJason FurmanTop Trump official tells Republicans to expect blockbuster GDP number Friday On The Money — Sponsored by Prudential — Trump blasts Europe on trade, defense spending before summit | White House to propose 0B more in China tariffs | BMW shifting some production out of US Is tax reform working? Not if you’re a worker in need of a raise MORE, the top economist for Obama, disagrees with me on the effects that Trump policies have on real GDP growth. In fact, using the ploy of damning with faint praise, he said of the 2017 tax cuts in a recent debate, “I think policy can make a difference. The tax cuts will make a very, very small positive difference, probably about half of one-tenth of 1 percent.”
History tells us a very different story than the naysayers. Lowering taxes and decreasing regulation has had powerful effects on growth over long periods of time. Taxes have a very important impact on employment, jobs, output and growth. An economy quite simply cannot be taxed into prosperity. The tax cuts signed by Trump stand in stark contrast to the tax increases under Obama. Corporate and personal tax rates were way too high. The Republican bill reduced those tax rates a lot. It included 100 percent expensing of capital expenditures, territorial taxation, and the elimination of state and local tax deductions to promote growth.
Trump has also waged war on debilitating regulations, including eliminating the Affordable Care Act individual mandate, along with reducing other health care and energy regulations as well. Monetary policy is now refocusing on market forces rather than zero interest rates, which means that money will flow to where it is needed, not to where some university professors believe it should go.
When it comes to trade, there are problems and risks in the vision Trump is carrying out. Trade should be free and with minimum barriers placed on American exports to other countries and foreign exports to the United States. We should, as a world, move to zero tariffs everywhere. We should eliminate other barriers and trade subsidies. Obviously, such an ideal world is not plausible, but there is no reason we cannot try.
Foreigners produce some things better than we do, and we produce some things better than they do. Both Americans and foreigners alike would be foolish in the extreme if Americans did not sell foreigners those products Americans make better than foreigners in exchange for those products foreigners make better than Americans do. It is a winning strategy for everyone and makes for great prosperity around the world.
Finally, we have had a serious government spending problem in the United States for years. The economist Milton Friedman was famous for saying “government spending is taxation.” He is completely correct. If a country taxes people who work and pays people when they do not work, then it is unsurprising if a lot more people choose not to work.
The latest GDP figure is a great number that aids our recovery from the awful 16 years under Bush and Obama. It will also reduce deficits in the long term if such robust economic growth continues. But the challenge is far from over. We have a lot of work to do to fan the flames of prosperity and to hold at bay the prosperity killers. But one step forward is still one step forward, and it is a heck of a lot better than one step backward.
Arthur B. Laffer is chairman of Laffer Associates. He was an economic adviser to the 2016 presidential campaign of Donald Trump and served as an economic adviser to the White House during the Reagan administration.
Published at Sat, 28 Jul 2018 14:00:06 +0000