Paul Grilli remembered the implosion clearly. It was April 28, 1982, and the Youngstown, Ohio, native stood across from U.S. Steel’s Ohio Works, one of the last massive plants in the city. His father was an unemployed steelworker. The family watched as four blast furnaces collapsed, brought down by dynamite a few years after the facility had been shuttered.
It was the symbolic end of an era. A huge U.S. company had been devastated by Japanese competition. The steel, aluminum and auto industries seemed to be dying. “My father, my uncle, my grandfather, they had all lost jobs. They didn’t know what was going to happen,” recalled Grilli.
Today, Youngstown is a very different place: downsized, less industrial, but not postindustrial. Grilli now delivers aluminum ingots to industrial customers throughout the Midwest, and he has friends who work for a thriving company called Youngstown Tool & Die, the type of Rust Belt firm that, like U.S. Steel, thrived long ago, when the American economy was flush and its manufacturing sector was unchallenged by foreign competition.
But Youngstown Tool & Die, which supplies equipment to aluminum producers to transform metal into a wide variety of products, was also more nimble. It survives to this day, and—right now, in the midst of a booming economy—is flourishing. This past summer, the company announced it would spend $13 million to build a new plant, and in the process would add 57 employees, a 20 percent increase. The expansion plan, said its general manager, Dave Mrdjenovic, was a function of the “very strong economy,” the benefits the company received from the corporate tax cut the Trump administration passed, and a “stable’’ regulatory environment. The company now hopes to expand its sales nationally and begin exporting to Canada and Mexico.
In that sense, Youngstown Tool & Die is a poster child of “Trump-onomics.” Amid the craziness of the Trump era—the whispers about the 25th Amendment being used to remove the president, the ongoing Mueller investigation into alleged Russian collusion, the intensifying trade war with China, the incessant tweets, the erratic, impulsive decision-making—the one thing administration officials believe they can say unequivocally is that they own the economy.
“I will be the greatest ‘jobs president’ God ever created,” Trump pledged during the 2016 campaign. Presidents always exaggerate what they can do to fix an economy and claim more credit than they deserve when times are good. Other powerful forces—monetary policy, global growth rates, geopolitical shocks—shape the nation’s financial health. Nonetheless, Trump aides say, by many measures, this president is delivering on his promises.
Unemployment is at 3.7 percent, the lowest rate since 1969. Consumer confidence is at an 18-year high. Small business enthusiasm is greater than at any time on record. The stock market is booming. And the economy grew in the second quarter by 4.2 percent, and may well clock in for the year well above 3 percent. “The days of secular stagnation”—the Obama administration’s description of a slow growth U.S.—”are over,” said Larry Kudlow, head of Trump’s national economic council. “This is sustainable.”
In fact, Trump believes the health of the economy should be the defining issue in the upcoming midterm elections, the one thing that might fend off a Democratic wave. “The economy is soooo good,” the president tweeted in September, “perhaps the best in our country’s history.” Voters, however, are split on that assessment, setting up a strange—and foreboding—dynamic for Republicans in November.
According to the Pew Research Center, about half of Americans now rate the national economy as “excellent or good,” among the highest numbers in nearly two decades. But views, as with everything else in the Trump era, are sharply partisan: 73 percent of Republicans and GOP-leaning independents feel positive about the economy, while just 35 percent of Democrats and Democratic leaners agree. And even as solid majorities in both parties remain optimistic about their personal financial futures, Trump is not getting full credit: His approval ratings hover around 40 percent, despite the booming economy.
Some Republicans fear the president’s incendiary rhetoric and penchant for stoking controversies overshadows the good economic news, making it difficult, if not impossible, for the GOP to run on the economy; immigration, Russia and the battle over the Supreme Court have dominated campaigns as polls show Democrats in a strong position to reclaim the House. “The political side of this is astounding,” said Austan Goolsbee, Obama’s former economic czar. “There has never been an economy humming along as well as ours has been for so many years in which so few people give credit to the administration.”
For their part, Democrats argue that “Trump-onomics” have done little for middle-class Americans. Wage growth, a key promise of the administration, has only recently shown signs of picking up; for most of Trump’s time in office, workers’ pay has remained largely stagnant. And the number of people who have stopped looking for work, though declining for several years now, is not coming down as quickly as Trump’s economic advisers expected. (These “discouraged workers” are not counted in the official unemployment rate.) In August, a Quinnipiac University poll found that 58 percent of voters felt the Trump administration wasn’t doing enough to help the middle class.
So if the midterms are a referendum on Trump, what have his policies actually done to the economy? Have they really jump-started the slow but steady growth of the Obama era in the same way Ronald Reagan’s policies in the early 1980s helped turn “stagflation” into a 20-year boom? Or are we in the midst of a sugar high—an economy boosted by significant stimulus, a deficit-raising tax cut—that will wear off quickly, dropping the U.S. back into the Obama era? Are the numbers “results to celebrate, not resist,” as embattled Republican Representative Barbara Comstock recently put it in a debate? Or do they paper over an economy built for the wealthy few?
The ‘New Normal’?
The Trump administration’s case is straightforward: A corporate tax-slashing bill coupled with a broad push for deregulation has supercharged the economy and changed corporate behavior, encouraging businesses to make investments they otherwise wouldn’t have and—in the best-case scenario—hire more workers.
But the reality is more complicated, which is why some of Trump’s aides cringed earlier this year when the president cheered nearly every time a company announced it was doling out special bonuses to employees with some of their newfound cash. AT&T, for example, gave a $1,000 bonus to 200,000 employees after Trump signed the tax bill. Sure, those bonuses boost individual workers, but they are also a one-off and will have little overall effect on the economy. Some economists argued the payments indicated that investment opportunities for companies might be relatively scarce—otherwise the funds would go into those opportunities.
Trump would be smarter, politically speaking, to point to a small company like Youngstown Tool & Die, whose GM partly credits the tax bill for his $13 million expansion plan. “The tax changes were certainly part of our calculation,” said Mrdjenovic.
Investments like that, from companies of every size, will determine whether the Trump tax cut was wise policy or not. Why? Because investment tends to drive employment, increase productivity and raise wages for workers. Productivity growth enables companies to pay workers more without raising prices or cutting profits—it’s the magic elixir for sustained economic growth, which has been lacking in the U.S. for over a decade.
There are early signs that might be changing. Capital investment is growing in 2018 at a respectable rate—5 percent year on year—and has accelerated in the last two quarters. But it’s not yet the boom Trump advisers thought was coming thanks to the corporate tax cut. More promisingly, a 2.9 percent increase in hourly wages in the second quarter—the biggest quarterly increase since 2009—was accompanied by a similarly brisk increase in productivity. If, over time, that continues, it’s plausible that Trump’s policy changes will have done as advertised: jolted the economy to faster, sustainable growth.
But one quarter’s data does not make a trend. The key phrase is over time. Thus far, the Trump economy has not created a rapid surge in new jobs, as the president claimed; the monthly numbers in Trump’s first two years are not significantly different from Obama’s last two. What’s surprising is that hiring continues to be relatively strong this late into an economic expansion that began nearly a decade ago, after the Great Recession ended in 2009. It’s also unusual that growth seems to be accelerating, at least for now.
Trump’s bullish advisers believe, as economist Steve Moore said, that “this is the new normal.” Kudlow claimed acceleration in growth reflected the “beginning of the effects of the tax cut”—which, according to the Congressional Budget Office, adds $1.5 trillion to the deficit over a decade—“but not only the tax cut’’; the administration says its commitment to deregulate broad swathes of the economy is also driving growth higher. “We are in an economic boom,” said Kudlow.
That a lighter government touch across the economy—and in particular in finance, manufacturing and energy production—can benefit growth is not in dispute among mainstream economists.
And there is some anecdotal evidence to support the administration’s claim that deregulation is boosting business. John Simmons, who runs a lumber mill outside Lincoln, Nebraska, said he expected lower energy bills because of Trump’s revisions to the Obama-era Clean Power Plan, which intended to phase out coal-fired electric plants. For him, that means more money to go to investment and wages.
Youngstown Tool & Die is expending less effort on paperwork for health and safety regulations. That saves time and money, and if replicated by businesses throughout the economy, it can help boost growth.
But there’s little data to support broad conclusions. Some economists, and many businesspeople interviewed for this story, believe the mere promise of deregulation has stirred what John Maynard Keynes famously called “animal spirits”: the belief that regulatory relief helps create a surge in business optimism, which in turn triggers more investment, more hiring and more growth. There is, of course, no way to measure animal spirits, though economists point to indicators such as small business confidence—now close to all-time highs—as a reflection of economic optimism.
Asked late this summer how much in regulatory costs had been saved by the Trump administration’s policies, Neomi Rao, who runs the Office of Information and Regulatory Affairs, responded, “So far, about $8 billion.” That may sound like a lot, but it isn’t. The U.S. is a $4 trillion economy. The relatively small amount in savings thus far speaks to an important reality: It takes a long time to really cut regulation—most changes from the executive branch require a review period. Moreover, much regulation is statutory; that is, it’s regulation-required by congressional action, meaning it can only be undone via new legislation.
That’s why, for all the talk about rolling back regulation, the dirty little secret is this: The Trump administration has merely slowed the imposition of new rules. In the manufacturing sector, for example, Trump has issued 34 major new regulations (rules that have an economic impact of $100 million or more in a single year), compared with 79 under Obama, and 54 under George W. Bush. From businesses’ standpoint, that’s considered progress. But as Keith Belton, director of the Manufacturing Policy Initiative at Indiana University said, the net cost of federal regulation is still climbing, “but the rate of increase is much less under this president than under previous administrations.”
‘Trump Boom’ or Bust?
Some economists scoff at the notion that we’re now experiencing a “Trump boom.” Unemployment was already falling under Obama, even with slower gross domestic product growth. Trump likes to brag that joblessness among African-Americans and Latinos has also plunged, but that trend also began under the previous administration too. “When you hear how great the economy’s doing right now, let’s just remember when this recovery started,” Obama told a crowd at the University of Illinois in September.
Trump, of course, had campaigned on fixing what has been perhaps the single biggest economic conundrum of the 21st century: stagnant wages. “We’ll get your salaries and your wages up, up, up,” he said at a Florida rally in 2016. And his administration doubled down on the promise, vowing that the GOP tax bill would bump wages by $4,000 to $9,000. That hasn’t happened. Average hourly wages are up fractionally year over year, according to the Labor Department’s latest estimate, barely keeping pace with an increasing inflation rate, though the latest jobs report showed weekly pay rising by a healthier 3.4 percent.
Businessmen such as Simmons say they’ve handed out just modest raises in recent years, primarily because competition in their industries is brutal: “You’ve still got to keep a tight rein on costs,” Simmons said. According to Bloomberg News, an internal poll commissioned by the Republican National Committee in September found that more than 60 percent of voters now see the tax bill as benefitting “large corporations and rich Americans” over “middle-class families.”
“I think people are pretty wise. On the tax cut they are looking at who got the money and saying, ‘Wait, I didn’t see anything,’” said Goolsbee. “The average observer is not wrong to think that this was a boon to corporations but not workers.”
Another concern: The strong economy isn’t driving “discouraged” workers back into the labor force as quickly as White House policymakers expected. (In the Obama era, as the number of those who have stopped looking for work rose in the wake of the Great Recession, the standard Republican joke was that the official unemployment rate would go to zero because every job seeker would opt out of the workforce.) The most recent data, through September, show that year over year there was no decline in the number of discouraged workers, which suggests the economy may not yet be strong enough to pull more people back into the workforce. That’s important, because discouraged workers, plus part-timers who wish to work full time (called “underemployed”), can depress wages.
The problem, said Dartmouth economist David Blanchflower, is that there are still “lots of part-timers” who say they want to work more hours. Those people will work part-time for less money. That overhang of discouraged and underemployed workers means the labor market may be tight, but not as tight as a 3.7 percent unemployment rate would suggest.
To which Kevin Hassett, the chairman of Trump’s council of economic advisers, said, “Give it time.”
It’s Not the Economy, Stupid
In 1992, James Carville, a Democratic strategist for Bill Clinton, coined an axiom for campaign workers: “It’s the economy, stupid.” Clinton, of course, went on to beat President George H.W. Bush, whose bid for a second term was done in partly by a recession. Ever since, the motto has served as a political rule for both Republicans and Democrats. Not this year. As Trump boasts about jobs numbers, the economy has been virtually absent in GOP campaigns.
According to surveys by the Wesleyan Media Project, which analyzes political ads across the nation, only 10 percent of GOP spots mentioned jobs, compared with 13 percent of the Democrats’. The same survey found that for GOP house races, “jobs” ranked fourth, behind taxes, immigration and health care. Republicans are scrambling to motivate their base to turn out amid forecasts that predict them losing control of the House, if not the Senate. “Touting low unemployment is not likely an issue that makes Republicans angry enough or anxious enough to get to the polls,” said Mike Franz, co-director of the project.
Others blame the president himself for souring what should be a decisive advantage. “We’d be much more relaxed if the president didn’t keep stepping in it,” said the chief of staff to a Republican incumbent in a tight House race, who spoke on condition of anonymity. “If we had a normal president with this economy, I think we’d keep control of the House. As it is now? I don’t know.”
Trump’s own lack of discipline when trying to talk up the economy exacerbates public perceptions that he’s untrustworthy. Last month, he falsely claimed in a tweet that the rate of GDP growth was higher than the unemployment rate for the first time in “100 years.” Hassett had to clarify, saying someone had probably added a zero when relaying the news: It’s the first time in 10 years that GDP outpaced unemployment.
If the midterms were turning on the economy, the GOP would have a strong case. Growth has picked up, and as Jerome Powell, chairman of the Federal Reserve, put it in a talk in Boston in early October, the economy is “not too good to be true.” The fiscal stimulus from the tax cut, he said, “provides real support this year, and for the next couple of years,” predicting less than 4 percent unemployment through 2020. He also said there’s the possibility that the “supply side effects’’ that Trump’s advisers love to talk about could emerge: lower taxes leading to higher profits and more capital spending, which eventually drives up wages and productivity growth, resulting in a long, low-inflation boom.
What could go wrong? If business investments don’t continue to increase briskly, growth will wane, wages will remain stagnant, and the U.S. deficit will be much higher. That would limit the government’s ability to cushion the effects of the next recession.
The low unemployment figures are also raising concerns that the economy is now “overheating”—a condition when unusually low joblessness can trigger spikes in inflation and destabilize financial markets. In the first week of October, bond traders reacted to the latest jobs report by driving the benchmark 10-year Treasury bond to its highest level since 2011. Banks and other lenders base their own interest rates on Treasury yields, and critical interest-sensitive sectors of the economy such as housing have already begun to slow. Powell said recently that the Fed intends to raise its key rate at the end of this year, and perhaps several times next year. Increasingly, investors are worried that higher rates may choke off the ongoing expansion.
Brian Wesbury, chief economist at First Trust Portfolios, an Illinois investment firm, and other financial experts say the only way to keep growth going is to exercise some spending restraint—the kind President Clinton and House Speaker Newt Gingrich agreed upon after the GOP seized control of the House in 1994. Not spending cuts necessarily, but a reduction in spending growth. The thinking: If the growth of tax revenue brought in by a stronger economy is higher than that of spending growth, the deficit would begin to come down.
The catch? There is virtually no constituency for spending restraint in Washington, thanks principally to Trump himself, head of the party that used to make fiscal responsibility its calling card. Without it, Wesbury said, the economy will slow in a couple of years, back to what he calls the “plow horse” days of the Obama administration.
There is, finally, one other significant risk: a trade war. Trump’s use of tariffs against U.S. trading partners has so far barely dented a strong economy. He managed to avoid ripping apart NAFTA, which would have unnerved investors and disrupted supply chains in key industries. But a much bigger showdown looms with China, the world’s second-largest economy.
The U.S. equity market, near all-time highs, has convinced itself that Trump will ultimately do a deal with Beijing, and, for his part, the president believes he is “winning” the trade skirmish because the U.S. economy is healthier than China’s. China, he reasons, has far more to lose because it exports so much more to the U.S. than vice versa.
That, according to business executives in China and policy analysts in Washington, may fundamentally misread Beijing, who will not be seen backing down and losing face at home. Though the U.S. only exports $130.4 billion to China (compared with imports of $505 billion in 2017), U.S.-based companies do a huge amount of business within China, making them very vulnerable to a government seeking economic revenge. “This thing is going to get a lot darker before it gets brighter,” said Scott Kennedy, deputy director of the Freeman Chair in China Studies at the Center for Strategic and International Studies, a Washington, D.C., think tank.
In other words, this year’s surge in growth could get derailed before much money ever shows up in working-class wallets, thanks to trade and a Congress apparently unwilling to even consider a reduction in the growth of government spending. That, leading into the election Donald Trump really cares about—his own, in 2020—could leave the U.S. with a huge fiscal hangover, and a trade war whose potential economic damage might be devastating.
Under those circumstances, the “plow horse” economy of the Obama years will never have looked so good.