President Trumpâ€™s supporters tout the economyâ€™s pre-pandemic performance as evidence that tax cuts and deregulation were making America great again. Detractors look at the data and find these policies wanting or outweighed by the harmful effects of Mr. Trumpâ€™s aggressive approach to trade and his isolationist approach to immigration.
Both views are misguided. A closer look at the data from the past four years exposes the folly of inferring anything about a presidential administration from how the economy performed. Consider these four lessons:
Lesson 1. Presidents often get credit or blame for the economy even though uncontrollable events often matter more than policy. Consider the data for Mr. Trumpâ€™s full term. Based on the latest forecasts, the economy will have grown since the beginning of 2017 at an annual rate of about 1.5%, the worst performance of any president since Herbert Hoover. Job growth has been even more dismal, at around three million jobs lost over the past four years.
These numbers are obviously meaningless in assessing Mr. Trumpâ€™s economic policies given a once-in-a-lifetime pandemic. While one could debate the effect on the economy of the presidentâ€™s mismanagement of the public-health crisis, no one would argue that the GDP and unemployment numbers are reflective of his regulatory reforms or immigration restrictions.
The same point applies to other years too, even if the magnitude and causes are not nearly as stark. For example, Mr. Trumpâ€™s supporters sometimes credit him with turning the economy around because growth increased from 1.7% in 2016 to 2.3% in 2017. But much of the change is explained by an increase in the pace of exports caused by the 0.7 percentage point pickup in the growth rate of Americaâ€™s trading partners in 2017. Giving Mr. Trump credit for that â€œturnaroundâ€ makes about as much sense as blaming him for â€œruiningâ€ the economy with his terrible four-year growth rate.
Lesson 2. Presidents are often at the mercy of the business cycle. Trump supporters like to point to the 2.5% annual growth rate during the first three years of his presidencyâ€”much better than the 1.9% annual rate under his predecessor. President Obamaâ€™s supporters counter that the economy added 1.5 million more jobs in the last three years of his presidency than it did in the first three years of Mr. Trumpâ€™s presidency.
Neither comparison is meaningful. The Obama administration inherited negative growth in the first half of 2009 because of a financial crisis it didnâ€™t create. During Mr. Trumpâ€™s first three years, job growth slowed because the economy was approaching full employment. The economy operates in periods of business cycles, not presidential terms.
Lesson 3. Economic data often say more about short-run, demand-side policies than they do about longer-run, supply-side effects that motivate much policy making. The U.S. economy did outperform expectations from 2017-19, growing at an annual rate 0.4 percentage point faster than the International Monetary Fundâ€™s October 2016 forecast. This is a larger outperformance than most other Group of Seven countries over that period, suggesting there may have been something U.S.-specific helping to boost growth.
Policy did play a role. Before the pandemic struck, the Federal Reserve had already cut interest rates to almost their lowest level in any recession in history. And Congress passed spending increases and tax cuts that were larger than the response to all but two of the recessions since the 1960s. Itâ€™s no wonder the economy grew faster than predicted. If anything, the surprise is that the economy did not grow faster still.
Lesson 4. We are generally better off inferring the effects of policies like tax cuts from a range of evidence and experience than from a single example. If you want to know what a tax cut does, you canâ€™t simply look at the economy in the three years after it becomes law. Tax cuts have short-run and long-run effects that may differ, and you canâ€™t be sure whether the effect you observe is the result of the tax cut, another policy or a huge random event like a pandemic. Better to study 20 tax cuts from 20 countries. My own research with Robert Barro found that the tax cuts would add less than 0.1 percentage point to the annual growth rate over the next decade, which is likely less than the reductions due to immigration restrictions.
Twisting whatever happens in the economy to support prior views is an all too common pursuit. But this wishful thinking does incorporate an essential truthâ€”if your prior views were based on evidence, then they shouldnâ€™t need much updating. Everything we know from economics says Mr. Trumpâ€™s policies boosted short-term demand but slightly reduced longer-term growth by restricting immigration. Thatâ€™s about all we can say for sure.
Mr. Furman, a professor of practice at Harvard, was chairman of the White House Council of Economic Advisers, 2013-17.
Copyright Â©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
Appeared in the December 30, 2020, print edition.