Early in 2018, Republicans in Washington ran an experiment: after passing a tax cut, they poured additional government spending into an economy that didn’t seem to need it. Democrats gave them the votes to do it. Most macroeconomists expected new jobs but also higher inflation.
The jobs came. The inflation did not. The experiment worked. In 2020, Republicans plan to repeat it, this time without the tax cut. They will shower money on to a hot economy. Democrats, again, have already helped them. US president Donald Trump will face many obstacles to his re-election next year. The economy will not be one of them.
The 2019 data has been hard to explain. Corporate investment collapsed. Confidence among chief executives dropped to a 10-year low. But unemployment has remained at or below 4 per cent for more than a year and a half. Working-age adults continue to rejoin the labour force. Hourly wage growth for workers not in management is at 3.7 per cent. Inflation remains stable and feeble.
The consensus among Wall Street and US Federal Reserve economists is that 2020 will see another year of this happy miracle: low business investment, decent economic growth, continued historically low unemployment and reasonable pay rises. “It’s difficult to see an economy that’s not OK,” said Ellen Zentner of Morgan Stanley. Her forecast is only slightly more optimistic than most: 1.8 per cent gross domestic product growth, 3.2 per cent unemployment, and a modest uptick in business investment. If 2020 proves to be a pocketbook election, this is all good news for an incumbent.
To explain this success, Republicans look back at the past two years and see a faithful application of conservative principles. They lowered business taxes. They cut regulations. But it is hard to find evidence that either of these things worked at the scale the GOP had hoped.
Corporate tax cuts are supposed to create long-term growth through investments in new plants and gear. That makes labour — and the economy — more productive. But business investment has been unimpressive for the past two years, and has actually declined since the summer. Measures of worker productivity have declined, too.
The costs and benefits of regulations are notoriously difficult to quantify, but even if we take the White House’s estimates of what businesses saved at face value, we end up with a total of $13bn in 2019. Over about the same period, the US economy grew by $530bn. Deregulation explains just 2 per cent of that growth; the scale is similar all the way back to 2017. You could argue that deregulation encourages businesses to invest, but again: we haven’t seen a lot of investment.
Maya MacGuineas, head of the Committee for a Responsible Federal Budget, has an alternative explanation: “The talking points are that it comes from tax cuts and regulation. The reality is that it comes from a massive run-up in government spending.”
To understand what she means, take a look at the peculiar way in which the US creates its federal budget. Since 2013, Congress has appropriated money under “sequestration” — arbitrary spending caps that were designed intentionally to be so destructive that Congress would have to agree on something better. But it never has.
For the past six years, fiscal policy in Washington hasn’t been about passing a budget. It has been about minimising the damage from sequestration. Former president Barack Obama was able to negotiate a bit with Congress, lifting the sequestration caps by between $20bn and $50bn per year.
Then, under Mr Trump, everything became more generous. In February of 2018, a bill — passed with support from Democrats in the House and the Senate — lifted the sequestration caps to add $143bn in spending in 2018, and $153bn in 2019. At the time, the non-partisan Congressional Budget Office was forecasting that the US economy was already at capacity and could not speed up without causing inflation.
This prediction proved so untrue that in August of this year, Republicans and Democrats got together and again agreed to raise the sequestration caps, this time by $168bn in 2020, and $153bn in 2021.
This spending shows up clearly in America’s quarterly GDP numbers. Between 2013 and 2018, federal spending was a drag on GDP. Since 2018, Washington has written enough cheques to add on average a quarter of a percentage point to economic growth.
For the past two fiscal years, and the next two, Congress has agreed to a spending stimulus for Mr Trump’s economy that is three to five times greater than that given to Mr Obama. Republicans may not describe events that way. But that doesn’t stop them from enjoying it.
Ms Zentner points out that another stimulus is coming in 2020. The federal government is expected to hire 400,000 temporary workers by May to carry out a constitutionally mandated decennial census. Job growth in census years “looks like a patient that’s plugged in to the heart machine at the hospital,” she said, “you get a massive wave of hiring around mid-year.”