Post #4482 Commentary The State of the Union Part II

For the first post in this series, see here.

The vision I will lay out this evening demonstrates how we are building the world’s most prosperous and inclusive society, one where every citizen can join in America’s unparalleled success, and where every community can take part in America’s extraordinary rise. From the instant I took office, I moved rapidly to revive the U.S. economy, slashing a record number of job killing regulations, enacting historic and record-setting tax cuts and fighting for fair and reciprocal trade agreements.  [source]

Actually, there's very little a POTUS can do under enumerated responsibilities in the US Constitution. For example, Congress holds the power of the purse, passes laws, ratifies treaties. To some extent, Trump has been able to offset some of the Obama-initiated regulatory burden. Whereas business tax reform was passed into law, business investment has slumped in response to a sluggish global economy and uncertainty under Trump's unprovoked trade wars. Other tax cuts were not permanent in nature, an artifact of the GOP not having a filibuster-proof majority and having to work under 10-year budget resolutions. More importantly, Trump and the GOP Congress did not offset tax cuts with politically unpopular spending cuts, and we are within sight of the first $1T deficit since Obama's first term. This adds to an ever expanding cost of serving the growing $23T national debt.

Moreover, Trump has done nothing to reform the cost drivers for spending/deficit beyond ever increasing entitlement spending  Social security and Medicare have large unfunded liabilities and within years of exhausting reserves.

"Fair and reciprocal" trade is basically a euphemism for mercantilistic trade policies. The preferred policy is unilateral free trade. Trump's policies, like for steel and aluminum tariffs, are ones of "concentrated benefits and diffuse costs"; they favor one industry at the expense of others, e.g., users of steel or aluminum inputs. Trump's tariffs are de facto tax increases on American consumers with mitigate whatever tax cuts and earnings increase he lays claim to elsewhere. Generally speaking, the consumers are worse off with less selection and lower competition for the consumer, translating to higher prices and a lower standard of living.

The unemployment rate is the lowest in over half a century. And very incredibly, the average unemployment rate under my administration is lower than any administration in the history of our country. The unemployment rate for African-Americans, Hispanic Americans and Asian Americans has reached the lowest levels in history. African-American poverty has declined to the lowest rate ever recorded. The unemployment rate for women reached the lowest level in almost 70 years, and last year women filled 72 percent of all new jobs added. In eight years under the last administration, over 300,000 working age people dropped out of the workforce. In just three years of my administration, 3.5 million people, working age people, have joined the workforce. 

First of all, poverty globally reached under 10% for the first time in world history. That reflects more of a market trend than anything from Trump's policies. Employment data have not been maintained in similar form across our history. The employment rate Trump is using is somewhat an artifact of how you define the labor force. The LFPR is about 2.5 points below when Obama took office in 2009, about 0.3 points higher than when Trump took office. Now part of that is accelerating retirements of Baby Boomers; some estimates are up to half to two-thirds of the observed gap. There are a couple of contrasting trends: early retirement through social security disability and an increasing percentage of working senior citizens. Some statistics show more workers were added during the last 3 years of the Obama Administration vs. the first 3 of the Trump Administration.

The natural rate of unemployment/full employment is generally considered to be in the range of 3.5 to 4.5%. And in fact unemployment (by the official U-3 number) had been halved from around a high of 10+% to about 4.7% by the time Obama left office. So there was a trend in place before Trump took office. Now the lowest on official records, contrary to Trump's assertion was 2.5% during the Korean War. To an extent when you see a dip below the full employment rate, it can actually reflect a worrisome (overheated) economy.

After decades of flat and falling incomes, wages are rising fast, and wonderfully, they are rising fastest for low income workers, who have seen a 16 percent pay increase since my election. 

Part of the story here is low inflation, not to mention that increases have eased off more recently. And in some cases this may be an artifact of higher state minimum wages, which is not a Trump policy. (And I would also point out higher minimums make it harder for younger/inexperienced workers to join the labor force.)

Real median household income is now at the highest level ever recorded.Since my election, U.S. stock markets have soared 70 percent, adding more than $12 trillion to our nation’s wealth, transcending anything anyone believed was possible. This is a record. It is something that every country in the world is looking up to, they admire... All of those millions of people with 401(K)s and pensions are doing far better than they have ever done before with increases of 60, 70, 80, 90 and 100 percent and even more. 

There's been a change in the data collection a few years back; adjusted figures show household income was higher in 1999. The bottom 80% own only about 7% of stock market; the overwhelming percentage (>80%) is owned by the upper 10%. Not to mention part of the story here is attraction of the strong currency to foreign investors, global growth has been sluggish and the Federal Reserve has been accommodating, including recent rate cuts. For many investors, starved by anemic returns in CD's, bonds, etc., stocks have been the only game in town. Now, of course, the stock market hasn't been monotonically increasing (consider the market selloff in late 2018 and volatility after Trump's tariff increases) under Trump. One assessment showed the Dow up 43% after 2 years under Trump, but 72% under Truman, 124% under Eisenhower, 147% under Reagan, 148% under Obama, 199%  under FDR, 229% under Clinton, and 230% under Coolidge. Now to a certain extent, that's an unfair comparison, because the other Presidents served longer periods. On a more apples to apples approach using the S&P index and first 3 years in office, Trump's 42.2% barely edges Clinton's 42.1%, and trails Obama's 56.2% and Bush 41's 45.5%. More importantly, at fairly rich valuations, continued sluggish global markets (and certain stresses like the emerging coronavirus pandemic) impacting business sales abroad, and less likely Fed rate cuts, it's unlikely last year's strong gains can be sustained.

The 401K claim is pure hyperbolic bullshit. For example, I have a 401K under a major defense contractor during Trump's tenure, and it has done well, but nowhere near 60%. One source puts it at more like 27%, and both Clinton and Obama showed far stronger returns during their second terms.

Under the last administration, more than 10 million people were added to the food stamp rolls. Under my administration, 7 million Americans have come off food stamps and 10 million people have been lifted off of welfare.

This is misleading in multiple respects. First, the number of people coming off SNAP was coming down by the late years of the Obama Administration as the unemployment rate dropped, so there was an existing trend. And also on the state level, not under Trump's control, we saw a tightening of eligibility criteria in states, including work requirements.

Thanks to our bold regulatory reduction campaign, the United States has become the No. 1 producer of oil and natural gas anywhere in the world, by far.

While Trump has liberalized some constraints of natural resource exploration on federally-controlled areas and some overdue regulatory reforms, much of what Trump claims here has more to do with fracking and other technological innovations, a trend in place long before Trump became President. I'm not saying Obama helped the trend with his green energy agenda, environmental regulations, opposition to pipelines, and resistance to further development on federal property, but he did sign a long-overdue reform enabling oil exports, which provided a financial incentive to fracking and other activities.

 Jobs and investments are pouring into 9,000 previously neglected neighborhoods, thanks to opportunity zones, a plan spearheaded by Senator Tim Scott as part of our great Republican tax cuts

Actually, Trump doesn't have any way of proving his hype. The 2017 tax reform package did not include reporting requirements, an artifact of the budget reconciliation process used to pass tax reform to avoid a likely Dem filibuster. I will point out that Trump's expectation that domestic business investment in general would jump following tax reform did not pan out with lackluster results, and Fed chief Powell pointed to weakness in investment as a reason for sluggish growth in the third quarter last year.

Likewise we are restoring our nation’s manufacturing might, even though predictions were, as you all know, that this could never, ever be done. After losing 60,000 factories under the previous two administrations, America has now gained 12,000 new factories under my administration, with thousands upon thousands of plants and factories being planned or being built.

First of all, less than 9% of American jobs are in manufacturing. And this trend of decreasing employment has had more to do with improving productivity (including robotics) than to trade related constraints. This does not mean that American manufacturing has died; in fact, America produces about 18.2% of global output, marginally ahead of China (with a much larger population). And, despite Trump's hype, we have seen several months of declines in manufacturing output over the past year or so.

One of the biggest promises I made to the American people was to replace the disastrous NAFTA trade deal. In fact, unfair trade is perhaps the single biggest reason that I decided to run for president. Following NAFTA’s adoption, our nation lost one in four manufacturing jobs. Many politicians came and went, pledging to change or replace NAFTA, only to do so and then absolutely nothing happened. But unlike so many who came before me, I keep my promises. We did our job. Six days ago I replaced NAFTA and signed a brand new U.S. Mexico Canada agreement into law. The USMCA will create nearly 100,000 new high-paying American auto jobs and massively boost exports for our farmers, ranchers and factory workers.

Trump's economic illiteracy on the trade deficit is beyond the scope of this essay. I'll start this discussion by pointing out about half of imports are resources or components relevant to business operations and about half our exports are goods. Globally competitive imported resources enable business to contain cost pressures, enabling more competitively priced goods and services. Free trade pacts, including low tariffs, facilitate these processes. And, of course, consumers  reap the benefits of lower prices and greater variety of goods and services.

NAFTA, contrary to Trump's incompetent, invalid assessment, has been an economic blessing to all 3 member countries, enabling more integrated supply chains across artificial country boundaries, increasing economic growth, profits, jobs, lower prices and improved living standards in the world's largest free trade zone, of over 450M people

According to The Balance, 6 primary benefits of NAFTA are:

• quadrupled trade. In fact, Mexico and Canada are among the highest US export markets.
• lowered prices, e.g., by eliminating tariffs. Energy imports from Mexico and Canada lowered US dependence on oil exports from the Middle East, Venezuela and other volatile, unreliable suppliers. Food imports from our partners has saved billions versus other external suppliers.
• increased economic growth, up to 0.5%, especially in food, autos, and services. We have seen a quadrupling of US service exports to our partners. Most North American cars have parts made by partner nations, and Mexican auto imports have increased market share from other trading partners. American food exports to partners have quadrupled.
• created net jobs, by some estimates up to 5 million. It's likely that lower-skill jobs not outsourced to Mexico may have gone to other, e.g., Chinese suppliers.
• increased direct foreign investment,  from the US triple, from our partners, doubling over the past decade. We also have higher intellectual property protections.
• reduced government spending, by enabling broader competition for government contracts.

Have there by some temporary dislocations caused by higher competition among all 3 economies? Yes, for example, many small Mexican farmers found it difficult to compete against American corn exports. There are several economic constructs that come into play, including the law of comparative advantage and "concentrated benefits and diffuse costs". For instance, while small farmers found it difficult to compete against cheap US corn, Mexican consumers benefited from lower food prices.

Basically, every analysis I have seen on USMCA is that it is merely a cosmetic update on NAFTA, where Trump somewhat exacted some Mexican concessions on the auto industry and the US got more movement towards US dairy exports to Canada, but it really didn't move the needle on opening new markets or otherwise improving benefits to consumers.

On the whole, Trump has been negative on global trade, foolishly abandoning TPP and TIP for equally economic illiterate, largely political reasons (since Obama had pursued them); for example, many suggest the TPP exit has strengthened China's hand regionally. Some suggest that Trump's bullying of Canada and Mexico may have counterproductive effects in the long run as the nations pivot to other trading partners.

This concludes my second post in the series, with another segment upcoming in the days ahead.