How can the US economy be stronger
Gabriel Felbermayr, 43, is President of the Kiel Institute for the World Economy (IfW) and holds the Chair of Economics at the Christian Albrechts University in Kiel.
It is a bitter realization for all those who wish US President Donald Trump failure because of his barely tolerable political style or who deny his government actions the economic logic: The US economy is in the longest upswing in recent history. It remains to be seen whether and how the coronavirus can change this. One thing is certain: things have been looking up since mid-2009. And despite all prophecies of doom, the president, who is so incompetent in the eyes of many people, has not stifled the upswing.
Even if Trump garnished his economic successes in tweets and election campaign speeches with figures, some of which were made up - de facto the economy grew again by a remarkable 2.3 percent in 2019. The unemployment rate remains below four percent. The polling institute Gallup has found that Americans have more confidence in economic development than they have for two decades. That was before the coronavirus spread, but it's not bad for someone who not only opponents believe to be politically destructive. And certainly not bad for someone who wants to be elected for a second term in the fall.
In view of the discrepancy between the political gamble and the economic situation, two questions arise: How much Trump is in this upswing? And how sustainable is it?
First of all: Trump's showing off that he has rebuilt an economically ailing country and led to unprecedented prosperity is exactly that: showing off. By the time he moved into the White House, the economy had already recovered after a slight industrial slowdown. The background at that time was the decline in the price of oil, which slowed the booming shale oil industry and spread it to other sectors. This low was passed at the beginning of his reign. Trump received economic tailwind without any action of his own.
However, the US government then set some economic stimuli. Its most important instruments were a major tax reform, an "America first" foreign trade policy that initially pushes domestic production and the harmful side effects of which are not yet visible, as well as higher government spending. In addition, the Trump administration eased regulation in industries that the president considered important, which should stimulate investment. With success?
One thing in advance: It is always difficult to assess the effects of individual instruments on the economy in isolation. Only a comparison with a counterfactual scenario (what would have happened without the use of the instruments?) Would be meaningful. And that would require long time series that are not yet available.
As far as the lowering of corporate taxes is concerned, there is much to be said for a positive effect, at least in the short term. It is not surprising that a debt-financed tax cut leads to strong expansion. The private sector is given money by the state, which uses its creditworthiness for this. The reform was designed to primarily encourage investment. And indeed: In 2018, capital investments by companies rose by 4.6 percent, a little more than in previous years. However, this effect decreased again in the following year. In 2019, fixed investments grew by only 1.4 percent. The decline in oil and gas production, which in December was 25 percent below the previous year's level, is likely to have contributed to this.
Actually, in the year two after the tax reform, the consumers who were also relieved should carry on the upswing. But growth in private consumer spending has already lost momentum again after a slight increase in 2018. The tax cut, bought dearly with new debt, was probably no more than a flash in the pan.
Trump's China policy is working
Second: With his “America first” trade policy, Trump wants above all to bring industrial production back into the country and slow down geostrategic rival China. A large country like the United States, with an even larger current account deficit, can do better at the expense of others and afford aggressive trade policies because its large economy is not as dependent on others as smaller countries are. And Trump knows that his bargaining power is great.
With a view to China, its policies are effective. In the wake of the trade war, US goods imports from China shrank by around 72 billion US dollars (down 13 percent) in 2019 compared to 2018. All major types of goods were affected, but industrial intermediates and capital goods were about three times as bad as consumer goods. Exports of American products to China only fell by $ 17 billion. In percentage terms, this is of the same order of magnitude, but because of the unbalanced trade balance with China, the absolute damage for the Chinese is higher.
The US deficit in goods trade with China shrank by $ 55 billion to $ 366 billion in 2019. Because the US surplus in services trade with China remained almost constant, the deficit in the current account purred from 404 to 352 billion dollars. So Trump can announce: The Chinese are selling less to the US - as promised.
The latest trade deal with China, a kind of truce in the trade war, will not break the trend. With the Phase I deal, the Chinese have for the moment submitted to the USA. Roughly speaking, their imports of certain goods from the US are expected to be 95 billion US dollars higher in 2021 than in 2017, when the trade war with the US had not yet started - a doubling of imports of these goods from the US. Trump will be able to report further successes to US citizens.
This policy, which is successful from the point of view of a mercantilist like Trump, is bought at a high price. The USA has to compensate for cheap imports from China, for example in the area of industrial intermediate products and capital goods, with more expensive imports from other industrialized countries. Total imports therefore did not develop much differently in price-adjusted terms than in other large industrialized nations. After all, the economic damage caused by higher prices will be mitigated by tariff revenues of an estimated 35 billion dollars.
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