What unleashed the animal spirits in the American economy with the advent of Donald Trump, and how long will they stay unleashed?

While the deep recession of 2008–9 ended when Barack Obama had been in office only five months, the recovery from it for the rest of his two terms was sluggish at best. This is contrary to what is usual. Steep recessions tend to be followed by steep recoveries. After the deep recession of 1981–82, for instance, when unemployment rose higher than it did in 2008–9, economic growth was robust, with annual GDP growth averaging 3.9 percent and reaching 7.2 percent in 1984. In the seven years after the recovery began in 1982, the United States economy added the equivalent of the GDP of Germany to its own.

But the Obama presidency never saw annual growth of even 3 percent, and in 2011 it was a dismal 1.6 percent. With the election of Trump in November 2016, however, that changed with startling speed. GDP growth accelerated. In the second quarter of 2018, it reached 4.1 percent on an annual basis.

The stock market is what economists call a leading indicator, because it pegs current prices to expected future earnings. Thus it moves before similar trends begin to show in other parts of the economy. For instance, although the stock market began to recover  in March 2009 from the financial crisis of 2008, it was not until June of that year that the recession officially ended as the American economy stopped contracting and began to expand again, however slowly.

On Election Day 2016, the Dow-Jones Industrial average closed at 18,332. As, over the course of that night, an improbable Trump victory began to look ever more probable, markets plunged. Nobel Prize–winning economist Paul Krugman famously predicted they would never recover. But by the next morning, Dow futures were down only 15 points, and by the end of that day, the Dow was up a solid 251 points.

And it just kept going. On January 26, 2018, one year into the Trump presidency, the Dow closed at 26,616.71, a spectacular 41 percent rise in only 15 months. The market has been much more volatile for the rest of 2018, but as yet there has been no correction (defined as a drop of 10 percent or more).

Why has the stock market flourished so abundantly during the Trump administration? Tax reform and regulatory relief, the very things Trump ran on. The Obama administration had refused to address the country’s very high corporate taxes (the highest in the developed world) and had piled on new regulations, especially those favoring labor unions and the agenda of environmental activists, at an unprecedented rate, lowering corporate profits and diminishing economic opportunities.

Hillary Clinton had made it clear that neither tax reform nor regulatory relief would be addressed in a Clinton administration. So when Donald Trump defeated her, traders foresaw quickly rising corporate profits, and the market took off. The animal spirits were unleashed. Although Trump had campaigned on a corporate tax rate of 15 percent (down from a stifling 35 percent), he had to settle for a 21 percent rate. Still, that made a big difference. Under the old rate, a $1 million profit yielded an after-tax profit of $650,000. Under the new rate, the after-tax profit is $790,000, a whopping 21 percent increase. No wonder the market took off in anticipation.

Further, under the old tax law, corporate profits earned abroad were taxed at 35 percent as well, although foreign corporate taxes paid could be deducted from what was owed. (The United States was the only major country in the world to use a “global” taxation system as opposed to a “territorial” system, where taxes are paid only in the country where the profits are earned.) But the American tax applied only when the money was brought home.

The result of this law, inevitably, had been that companies kept their foreign earnings abroad whenever possible. By 2017, nearly $3 trillion in American corporate earnings was parked in foreign banks. That is more than the annual GDP of all but four countries. Under the new tax law, this money can now be repatriated at a flat 8 percent rate. Further, the United States joined the rest of the world, and future foreign earnings will be taxed only by the country where the profit is earned. Thus there is no longer any incentive to keep that money abroad.

All of this means that not only are corporations more profitable under the Trump tax law, but they now find it easier to invest in the United States out of their own foreign after-tax profits, increasing the pool of American capital. That in turn will help keep interest rates down and investment up.


The Trump tax bill also benefitted most individual families. Some companies immediately shared some of the extra profits with their employees, giving them one-time bonuses after its passage and some raising the wages of their lowest-paid employees. The new tax law also lowered income-tax rates for individuals, although it capped state and local tax deductions at $10,000, which will mean federal taxes will go up for many individuals and families in high-tax states such as New York and California.

Higher take-home pay in millions of households powered a “wealth effect.” People who feel richer, thanks to higher pay and more valuable financial assets, tend to spend more freely, boosting the economy as a whole. Although the tax bill was not signed until December 2017, its anticipation helped power the economy that year.

So did the steady repeal of regulations under the Trump administration. Indeed, on the very first day he came into office, President Trump signed Executive Order 13771. It directed government agencies that intended to issue new regulations to find and repeal simultaneously out-of-date or excessively costly regulations. A companion order required new regulations to have a net cost of zero.

As a result, while an average of 13,000 new regulations had been added annually in previous administrations, virtually none were added on net in the first 10 months of the present administration, a trend that has continued.

And the administration took advantage of the Congressional Review Act of 1996 to repeal, by act of Congress, regulations already in place. This had been passed as part of Newt Gingrich’s Contract with America in 1996. The act allowed Congress to repeal regulations that had already been issued by the executive branch. Congress had 60 “legislative days” (i.e., days when Congress was actually in session, not calendar days) to do so by joint resolution. As a joint resolution, any such repeal could not be filibustered in the Senate but would be subject to a presidential veto.

The act had been used successfully only once before (in the early days of the George W. Bush administration). When the Republicans got control of Congress during the last two years of the Obama administration, they passed five joint resolutions repealing regulations. President Obama vetoed all of them, nearly half of all the vetoes he issued in eight years. The Trump administration has used the Congressional Review Act no fewer than 16 times to repeal Obama-era regulations.

The Trump administration also stopped a practice, especially popular with the Obama Environmental Protection Agency, known as “sue and settle.” In this tactic, an environmental group, often at the implicit invitation of the government, sues the government, demanding that it take a particular regulatory action. The agency then quickly settles the case, agrees to implement the regulation, pays the group’s legal fees, and imposes the action without the public hearing-and-comment period that the ordinary regulatory process requires.

All in all, the steady repeal of regulation along with the anticipated tax reform caused the economy to expand in 2017 at its briskest pace since before the financial crisis.

Unemployment, which had stood at 4.8 percent in January 2017, trended down all year, reaching 4.1 percent in December. As the tax cuts kicked in, the employment rate continued to decline, reaching 3.7 percent in September 2018, a rate that has held steady since. That’s the lowest rate in nearly 50 years and a rate economists regard as “full employment.”

And while wages stagnated during the slow recovery of the Obama administration, the very tight labor market in the Trump years has begun to accelerate wage growth as employers increasingly have to compete for scarce workers. There are, for the first time, more job openings than job seekers. Wages increased in the last 12 months at a 3.1 percent rate, the highest since before the recession.

The American economy has been creating an average of 200,000 new jobs every month during the current administration. The total number of jobs created since Trump took office now exceeds 4 million. Construction jobs have increased by over 800,000. Black unemployment, at 7.8 percent in January 2017, is now 5.9 percent, the lowest figure since the statistic was first gathered in the 1970s.

Manufacturing jobs declined over the eight years of the Obama administration by 173,000, as manufacturing moved increasingly abroad. But in the first 22 months of the Trump administration, they have increased by 526,000, although manufacturing as a percentage of GDP has been declining for decades, as has the percentage of manufacturing jobs vis-à-vis total jobs. That trend will undoubtedly continue as the technology of robotics continues its rapid advance.

With the reduction in American corporate income taxes, foreign plants are more likely to open in this country, for they will be more profitable after tax than they would have been under the old rates.

U.S. energy production has been soaring in the Trump era, thanks largely to the revolutionary technologies of fracking and horizontal drilling, both pioneered in the United States. For the first time in decades, the United States leads the world in both oil and natural-gas production.

The country imported about half its oil as recently as 2006, when it brought in 12 million barrels a day. Today, daily oil imports are down to 3 million barrels, and the U.S. is exporting oil for the first time since the oil shocks of the 1970s. By next year, the country is expected to be a net exporter of petroleum and already has been in certain weeks of 2018.

While President Obama recently claimed credit for the country’s rapidly increasing energy production during the Trump administration, in fact the Obama administration did all it could to restrict energy production. It dragged out the permitting process, closed many areas of federal land and offshore areas to oil and gas exploration, and refused permits for pipelines. The Trump administration has reversed many of these policies. For instance, it quickly authorized the completion of the Keystone pipeline over which the Obama administration had dawdled for nearly eight years before finally turning the project down. With fewer restrictions, the energy industry will probably grow at an even faster rate than before.

Rapidly increasing American oil production has produced a global oil glut, and prices, which had been rising earlier in the year, have fallen sharply since early October, when oil topped $75 a barrel. In early December, it stood at $61. As the U.S. oil industry is highly efficient, it can still make a profit at a price where many other countries cannot.

Lower oil prices are a positive for the American economy as a whole. A lower cost at the pump puts more money in the pockets of consumers. Just a 30-cent-a-gallon drop in the price of gas per gallon, as has occurred over the last three months, makes a fill-up about $5 less expensive. Multiply that by the nearly 300 million vehicles in the United States, and a lot of money gets freed up for other purposes of American families and corporations. In addition, oil is a cost factor in practically all products and services. A drop in the price of oil reduces inflation and makes companies more profitable.

Besides the domestic economic effects of increasing American energy production, there are profound geopolitical implications, all of them favorable to the United States, which stands to become the world’s dominant energy producer. In early December, the secretary of the interior announced that the Delaware Basin in southeast New Mexico and West Texas holds a staggering 46 billion barrels of recoverable oil and 281 trillion cubic feet of natural gas, more than twice the amount to be found in the great Midland Basin to the east, which has been exploited for decades and is currently pumping about 2 million barrels a day. That’s enough oil and gas to power the entire United States economy for seven years.

There are weaknesses in the Trump economy. One of these is the participation rate, the percentage of the population over the age of 16 that is in the workforce. It has been declining for years, especially in the 21st century as the baby-boom generation (born between 1946 and 1964) has been reaching retirement age in increasing numbers and the life expectancy of the elderly has increased substantially. The participation rate was 65.7 at the beginning of 2008, as the economy was already in recession. It was down to 62.5 percent in January 2017. Despite the booming economy and very tight labor market, it is now only 62.9.

Another worrying metric is that among men ages 25 to 54, the prime working years, 19 percent are not working or looking for work. At the peak of an earlier business cycle, in 1989, the percentage of nonworking men in this age bracket was only 13.6. Part of this increase is surely statistical, where various metrics fail to capture men in a workforce that has a rapidly growing number of self-employed and contract workers. (And some of these nonworking men, to be sure, are in the underground economy, working for cash legally or illegally and thus trying hard not to be captured.)

How long can the Trump boom go on? No one knows that, obviously, but the recovery from the bottom of the last recession, in the first quarter of 2009, has been a very long one by historical standards, now 98 months of expansion.

And all booms must end, for the business cycle, which is an artifact of human nature, cannot be repealed.  When times are good, people are optimistic about the future and businesses look to expand and exploit opportunities. Equally, they tend to put off difficult or unpleasant things, such as laying off surplus workers, closing obsolescent plants, and seeking greater efficiency. Excesses get built into the economy until something changes, such as the end of rapidly rising housing prices in 2006. Then families and businesses begin to retrench and the economy cascades downward until the excesses are cleared and a new upward cycle begins.

Economic growth in recent years has been aided by the Federal Reserve keeping interest rates at historically low levels. But the Fed has been raising rates in recent months, and the increasing cost of money inherently slows down an economy as it makes capital more expensive.

The biggest looming problem in the short term is the global economy as a whole. In today’s world, no nation, and certainly not the United States, can exist in isolation. And while the American economy is currently robust, other major economies have been slowing and even slipping into recession. Germany and Japan, the third- and fourth- largest economies in the world—and the fourth- and fifth-largest trading partners of the United States—have both been contracting in recent months.

Even China, the world’s second-largest economy and our largest trading partner, whose rapid growth in recent decades has been near miraculous, is now slowing down. China is trying to evolve from an export-driven economy to a fully mature one, one dominated by local consumption. That might turn out to be a rocky road. Already total debt in China has been rising rapidly, and there are vast amounts of empty housing stock overhanging the Chinese real-estate market. Wealthy Chinese have been exporting capital in increasing amounts, which is never a good sign in a still developing economy.

And while lower oil prices are good for the United States, they are bad for such petro-states as Saudi Arabia, Iraq, and Nigeria, much of whose GDP is earned from the foreign sale of oil.

If the global economy, which has been slowing in recent months, were to slip into recession as a whole, it is hard to see how the American economy would not follow soon afterward. And a global recession will be much more likely if a full-scale trade war results from President Trump’s hardball tactics and mercantile instincts when it comes to trade.

In the long term, by far the biggest problem for the American economy is the inability of the federal government to live within its means. Fiscal 2018 was a year of abundant economic prosperity, and yet the annual deficit was $779 trillion, 18.9 percent of total spending, a level not seen since the depth of the 2008–9 recession and its early aftermath. The national debt is now at World War II levels as a percent of GDP, over 100 percent, having been as low as 34 percent in 1979.

Even a country as rich as the United States cannot indefinitely sustain this level of overspending during peace and prosperity. And yet there is little or no interest in Washington to do anything about it because politicians—always in the reelection business—tend to think in the short term.

Congress, dominated by local interests, controls the budgeting process, as it has since the early 1970s, when serious overspending began. The president, the only person in Washington elected by the nation as a whole (along with the powerless vice president), is largely sidelined. It will take a president with rare political skills and armed with a powerful electoral mandate to change that.

But change it must. Just consider: In 2018, the Treasury paid $523 billion in interest on the outstanding debt, 12.7 percent of total outlays. At the interest rates prevailing in 2007, the last year before the recession set in, the interest would have been nearly $1 trillion, equal to 22.7 percent of outlays. That would have resulted either in drastic—and politically difficult—cuts in other federal spending or the beginning of a fiscal death spiral as the interest on the debt was financed with more borrowed money.

American prosperity is at risk, even in the midst of this economic boom.

Donald Trump
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