Trump’s Economic Policy Has Nothing to Do With the Economic Boom Following His Inauguration. The Same Applies to Clinton’s Economic Policy and the 1996–1999 Boom.
To this day, no one seems to realize that Bill Clinton was falsely given credit for the economic boom during his second term. That boom had nothing to do with his policies. It is a pure myth spun by his advisors and reinforced by the press, which failed to do any analysis of the boom’s real causes and failed to understand and reveal that the conventional economic theory underlying his policy was utterly flawed and flatly contradicted by statistics. Namely, the theory that budget deficits raise interest rates and slow economic growth, and that reducing budget deficits through tax increases and government spending cuts leads to lower interest rates and stronger economic growth.
In fact, the economic boom during Clinton’s second term was not the result of his economic policy, consisting only of a small increase in taxes and small decrease in government spending, which according to his spin led to reduced budget deficits and lower interest rates. The reality is that the lower interest rates, economic boom and consequent big drop in the budget deficits had only to do with 1) an easing of monetary policy to stimulate a slowly recovering economy; 2) a big housing rebound after the early 1990’s S&L crisis; and 3) a historic capital spending boom due to the simultaneous roll-out of lap-tops, the internet, and mobile telephony, capped by enormous business and government spending to prepare for Y-2K.
Similarly, Trump is falsely given credit for the strong economic recovery since his inauguration, as it has practically nothing to do with his corporate tax cuts and regulation cutbacks. Rather, it has mostly to do with typically delayed economic strength following a deep financial crisis, just as happened in Clinton’s second term. Such economic recoveries take time to build up momentum, as the damage of the financial crisis is gradually repaired. At a certain point, the economy builds up steam. Just like Clinton, Trump is simply lucky: his term as president has coincided with the economic acceleration that was years in the making under Obama and finally took off 2017. (That acceleration would have taken place many years earlier, had Obama stimulated the economy during his first term or early in his second term with a much-needed big QE-financed tax rebate, up to $5,000 per taxpayer). In any case, Trump must be given credit for correctly criticizing the Fed in early/mid 2019 for prematurely tightening monetary policy and doing some “reverse QE” which slowed the economy. The Fed, to its credit, soon admitted its mistake, stopped its “reverse QE” and eased monetary policy with more QE. Economic growth resumed.
Trump’s corporate tax cuts combined with accelerated depreciation only provided a minor additional stimulus because, given existing excess production capacity, they did not lead to a boom in capital spending. Trump’s purpose, given an already recovering economy, was mostly to benefit corporations and especially real estate investors by reducing their taxes. Large QE-financed tax rebates benefiting all individual taxpayers, instead, would have led to much increased consumption which in turn would have led to higher capacity utilization, higher business profits, big capital spending increases, increased hiring, and higher wages. That would have been a much more effective stimulus, apart from being fair, with every taxpayer receiving the exact same stimulus check. No favorites, no discriminations.
© Edward Sonnino 2020
October 22, 2020
