President Trump is worried that economic underperformance over the next 18 months could be a risk to his re-election.
Trump promised as a candidate in 2016 that, if he were elected, economic growth would run at 4 percent a year, if not higher. The latest reports from the Commerce Department indicate that actual economic growth in 2017 was 2.2 percent, and 2.9 percent in 2018. Looking at the statistics on a quarter-by-quarter basis, growth slowed from 3.4 percent to 2.2 percent from the third to the fourth quarter of 2018.
Most economists outside the administration are not surprised that actual economic growth has not come close to Trump’s 4 percent goal, or even has run below the White House’s 3 percent expectation on an annual basis. The 2017 tax bill provided the economy with a “sugar high,” increasing income among corporations and wealthy individuals, but doing little to increase income for the great majority of middle-income households. Trump’s tariffs have now been in place long enough that businesses are passing them along to corporate and individual consumers through increased prices.
The consensus of academic and Wall Street economists is that economic growth will average between 2 and 2.5 percent in 2019 and 2020. The Federal Reserve Board’s latest projection is lower than the consensus, at 2.1 percent for 2019 and 1.9 percent for 2020.
Trump is starting to set up the Federal Reserve as a scapegoat for the problems with his administration’s economic policies. Last Friday, Trump tweeted that “Had the Fed not mistakenly raised interest rates, especially since there is very little inflation, and had they not done the ridiculously timed quantitative tightening, the 3.0 percent GDP, and Stock Market, would have both been much higher & World Markets would be in a better place.”
The Fed has been led since February 2018 by Jerome “Jay” Powell, Trump’s handpicked choice as board chair. Trump chose not to reappoint former chair Janet Yellen, in part because some of his advisers thought she was not an enthusiastic supporter of the President’s tax cuts, and that, under her leadership, the Fed had kept interest rates too low for too long. According to other reports, Trump did not reappoint Yellen because she did not “look the part,” and was “too short.”
Trump and his advisers are now criticizing Powell for pursuing exactly the opposite policy from the one they thought Yellen was carrying out wrongly. In a recent interview, Trump told Fox Business News that the economy would have grown by at least 4 percent in 2018 “if we didn’t have somebody (Powell) that would raise interest rates and do quantitative tightening.”
At the end of last week, Trump economic adviser Larry Kudlow, saying he spoke for the president, told CNBC that the Fed should lower interest rates by half a percentage point immediately. In the past, interest rate cuts of this magnitude have been used by the Fed when the economy was nearing, or already in, a recession. While most economists believe the United States is growing at less than its potential, in large part because of Trump policies, few experts see a recession, as opposed to below-trend economic growth, in the next 18 months.
Meanwhile, Trump is trying to up the ante in his criticism of the Fed by saying that he intends to nominate well-known Fed critic Stephen Moore to the Fed’s board. Moore, who is a gadfly, not a professional economist, has also advocated an immediate half-point cut in interest rates. Whether he will be formally nominated and confirmed by the Senate is still an open question, both because of his perceived lack of qualifications for the position, and because, as was reported last week, the IRS has obtained a judgment lien on Moore because he owes more than $75,000 in back taxes and other penalties.
Eric L. Davis is professor emeritus of political science at Middlebury College.