The economy is a big issue for voters. Independent voters rank the economy as their number one issue. About 55% of voters approve of Trump’s handling of the economy. And, he is leaning heavily on the economy to win him re-election. Analyses of past elections do show that an improving economy, and specifically a rise in GDP, give an incumbent an advantage. So, when we are talking about the economy, what are we really talking about and what is the current and historic state of the United States economy? Here is just a scratching of the surface of a very complex system
GDP
The strength of an economy is measured by GDP. The GDP (Gross Domestic Product) includes everything the U.S. produces by the people and the companies in the country, or our total output. The GDP growth rate measures if an economy is growing more quickly or more slowly than the quarter before. A healthy GDP growth is one that is stable, so many economists place the ideal growth rate at 2%-3%. When the GDP growth rate turns negative, we enter a recession as we did in 2007. During a recession income, employment, manufacturing, and retail sales drop in addition to GDP. If it stays negative long enough, we enter into a depression. Conversely, if the growth rate is too high, for example over 4% for several years, there is too much money chasing too few growth opportunities. It can also cause inflation, an increase in prices and the decline in the value of money. It’s unsustainable so eventually the bubble will burst which could also lead to recession. The Federal Reserve raises interest rates if the economy is growing too quickly and lowers them if it is growing to slowly in an effort to keep the economy in the ideal zone.
It is well known that Obama inherited an unhealthy economy. George W. Bush’s presidency, marked with the attacks of September 11, two extremely expensive wars, and the housing crash sent us into a recession and added more debt than any president before him since World War II. Obama became president during The Great Recession and inherited that economy and that debt. In 2009, the Obama administration passed a massive stimulus package to jumpstart the economy and it was successful. The economy has been growing at a steady, moderate pace averaging between 1.6% and 2.9% ever since. Trump inherited Obama’s economy and has maintained consistent growth between 2% and 3%.
Trump’s signature legislative accomplishment has been The Tax Cuts and Jobs Act, which he signed on December 22, 2017. He said it would be, “one of the great gifts to the middle-income people of this country that they've ever gotten for Christmas.” Yet, most of the tax cut went to businesses and higher income individuals. He predicted that the economy would grow to “4, 5, and maybe even, 6% ultimately.” After this tax cut, growth accelerated to 2.9% in 2018 (the average for 2016 as well, the year before Trump was sworn into office). In 2019, the U.S. economy grew 2.3%, which matches the average annual rate over the last 10 years. The average for his presidency is 2.5% which is .3% greater than the average for Obama’s presidency. Trump blames the decline from 2018 to 2019 on the Federal Reserve which has raised interest rates eight times since Trump’s election and lowered rates three times.
Jobs
I will likely go into greater detail concerning jobs in a future post. Briefly, in the 38 months since the 2016 election, the US economy has added 7.3 million jobs. In the 38 months before the 2016 election, the US added 8.4 million jobs. Employers added an average of 176,000 jobs a month in 2019 compared to 223,000 jobs a month in 2018.
Unemployment
What about unemployment? In a healthy economy, unemployment and inflation (increase in prices and the decline in the value of money) need to be in balance. It is said that the lowest level of unemployment an economy can sustain is between 3.5% and 4.5% without experiencing high levels of inflation. In November of 1982, unemployment broke 10% for the first time since World War II. By the time Reagan left office, it was cut to half of that. This started to rise half way through George HW Bush’s term and topped out at 7.8% when he left office. Clinton had a strong economy throughout his term and unemployment declined steadily ending up at around 4% when he left office in 2000. When George W. Bush left office in 2008 (during a recession) the unemployment rate was at its peak for his term at 7.8%. The recession continued through the beginning of Obama’s presidency topping out at 10% in October of 2009. It has been on a steady decline since the end of 2010. When Obama left office, the unemployment rate was 4.7%. It has been waffling between 3.5% and 3.6% since September of 2019. Black (5.5%) and Hispanic (3.9%) unemployment are at a record low.
Debt
Debt is how much we owe as a result of accumulated annual budget deficits. A deficit occurs when the government spends more than it takes in during a year. The more this happens, the more the overall debt accumulates. The U.S. currently has over $23 trillion in debt. The debt to GDP ratio rose from 35% in 2006 to 75% in 2016. And, it is predicted to be over 107% by the end of 2020!
So, how did we get here? Honestly, I don’t think debt is a partisan issue. Both Clinton and Reagan invested in education, infrastructure, and non-military research which ultimately drive both economic growth and wage gains as a result of improvement in labor force skills and worker productivity. Reagan managed to stabilize the deficit and Clinton actually had a budget surplus! The only president to do so since World War II. The debt exploded under Bush and remained high under Obama. Obama AND Bush added more debt than any president since World War II. Much of this was related to paying for 2 wars and the economic stimulus to bring us out of the recession. Obama never got the debt under control, despite restoring economic growth and reducing unemployment. Though, he did reduce the budget deficit each year he was in office. As a candidate, Trump promised to eliminate the debt. Instead, Trump has cut taxes and increased spending and has increased the deficit each year he has been in office. As a result, the debt has increased by $3 trillion in Trump’s first three years.
So, even if our economy is doing well, how does the debt come into play and how do we fix it? Left unchecked, this could lead to higher interest rates, a slower economy, a weaker job market, and higher taxes. Growing the economy, reforming the tax code to increase revenues, and reducing spending are all ways to tackle the debt. The debt does not need to go to zero to be healthy. Economists have said anywhere from 40%-60% of our GDP is healthier.
Based on my weeks of research, here is my summary: Bill Clinton was the economic master in terms of economic growth, jobs, unemployment, and the crown jewel: budget surplus. George W. Bush’s presidency, marked with the attacks of September 11, two extremely expensive wars, and the housing crash sent us into a recession and added more debt than any president before him since World War II. Obama inherited that economy and that debt. He turned the economy around in terms of growth, jobs, unemployment, and consumer confidence, but was not able to bring the debt under control. Trump inherited Obama’s economy and has built on it, but also continues to add to the debt with tax cuts and increased spending.
Income Inequality
So, is the economy benefiting everyone? In the 1950’s, CEO’s made 20 times more than the median wage of their employees. Last year, that rate ballooned to 287 times. It could be argued that the middle class has been cut out of decades of economic growth. Median household income has been basically the same for the past 20 years. Meanwhile, the top 1% have had their incomes nearly triple in recent decades. When politicians talk about income inequality, that is what they are talking about. Much of this has to do with a tax code that benefits the wealthy leading to billionaires like Warren Buffet paying a lower tax rate than his secretary.
So, what are the plans of our candidates? (If this is a stand alone issue for a candidate, I have linked their entire plan to their name):
Joe Biden: Biden says we need stronger labor laws and a tax code that rewards the middle class, not just the wealthy who have gotten too many tax breaks for too long. Biden will reverse Trump’s tax cuts for the super wealthy and corporations. He will eliminate tax breaks that reward special interests. He will get rid of the capital gains loophole for multi-millionaires.
Amy Klobuchar: Klobuchar believes in ensuring that all families have a fair shot in today’s economy. She believes that means investing in quality child care, overhauling the country’s housing policy, raising the minimum wage, providing paid family leave, supporting small business owners and entrepreneurs, and helping Americans save for retirement. She vows to cut child poverty in half in a decade and end it within a generation. She believes that economic injustice is a result of decades of systemic racism and inequality. She believes that fixing this begins with early childcare, fixing our education system, and ending housing discrimination so that everyone can afford to rent or own a home in a good neighborhood for their kids. She says we need to take on monopoly power and promote competition. In addition to her website, you can take the 20 minutes to read through her comprehensive economic policy here.
Bernie Sanders: Sanders aims to curb income inequality in his tax plan. His tax plan would target all private and publicly held corporations with annual revenue of more than $100 million. He wants to see a progressively higher corporate tax rate for companies with large gaps between their CEO and median worker pay.
Donald Trump: Trump focuses more on what he has done than what he plans to do. He highlights the Tax Cuts and Jobs Act, GDP growth, job creation, and low unemployment written about above. He also signed an executive order to expand federally funded apprenticeship programs and launched the Women’s Global Development and Prosperity Initiative allocating $50 million to the fund.
Elizabeth Warren: The heart of Warren’s plan is raising people’s wages and bringing down their costs. She believes that wages will be raised by increasing the minimum wage to $15/hour, strengthening unions, and ensuring women of color receive fair wages. She aims to reduce household costs by canceling up to 50% of student loan debt, bringing down the cost of rent, providing universal affordable childcare and early education, and making tuition free at every public technical, two year, and four year college.
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