The Trump Economy

Heritage Explains

The Trump Economy

What does GDP growth mean for the middle class? Is it helping? Or like many on the left say, is it just a favor to the wealthiest of Americans?

On this episode of “Heritage Explains,” co-host Tim Doescher interviews Stephen Moore, a distinguished visiting fellow in Heritage’s Project for Economic Growth, who also served as an economic advisor to Donald Trump during the 2016 presidential campaign. Moore helps to explain what exactly GDP is and the phenomenon of the Trump economy.

Tim Doescher: President Trump made some pretty bold campaign statements. But one of them receive particularly high criticism from the left and high praise from the right. That regards GDP growth.

“That's why I believe it's time to establish a national goal of reaching 4% economic growth. And my great economists don't want me to say this, but I think we can do better than that.” President Donald Trump  

Doescher: GDP or Growth Domestic Product is defined as the market value of all final goods and services produced within the country in a given period. It measures businesses, households, government spending, exports, while subtracting are imports or foreign products. While not perfect, it seems a reliable guide as to the general health of the economy. But one thing is safe to say, the higher growth, the better Americans are. Last Friday, when the Commerce Department announced that GDP grew by 4.1%, the White House took a victory lap, because many thought this number was almost impossible to reach. Now, many on the right are using this to push for more pro-growth policies like tax reform, and regulation reduction.

Doescher: So, let's break this down. What does GDP growth mean for the middle class? Is it helping? Or like many on the left say, is it just a favor to the wealthiest of Americans? To talk about the new GDP numbers and the state of our economy in general, I sat down with Stephen Moore, a distinguished visiting fellow in the project for economic growth here at The Heritage Foundation. He also served as an economic advisor to Donald Trump during the 2016 presidential campaign and continues to unofficially advise the president on economic issues. Stephen Moore, thanks so much for joining us today.

Stephen Moore: Thanks, Tim.

Doescher: Give us a brief description of what GDP is and whether or not you think it's an important measure of how our economy is doing.

Moore: The GDP is just the measure of precisely that, how the economy is doing, it's a measure of our collective output, everything we produce in a month or a quarter, or in a year. That number is off the charts, growing. This is as we predicted, if Trump put in place deregulation, and lower taxes, and all-American Energy policies and pro-business policies, that you would see this kind of unleashing effect of these businesses really expanding their output. By the way, this is ... we give a lot of credit to Trump for his policies, but this is a real testament to the 28 million men and women who run American businesses, who are expanding, finding ways to make profits, and hire more workers. This is a great time to be in America, it's a great time to be an American worker. I'm one of those people who thinks this can last for another two, or three, or four years.

Doescher: Many people have ... they've already heard the second quarter growth number being 4.1%, that's up from 2% in the first quarter of 2018, and they hear these numbers, 2% and 4.1% and say, "That's not that big of an increase." If you could maybe break it down and tell us what does it actually mean to go from a 2% increase to a 4.1% increase. Maybe you can put that in context for non-economists.

Moore: Let's see, we have a $20 trillion economy, so every percentage point increase in growth means something like $200 billion of additional output, that's the whole output of Michigan and Ohio combined. These are giant numbers. The economy under Obama was growing at a little less than 2% over his eight years in office. Under Trump, we're at 3% to 3.5% growth now, or in his term. That's a big increase, it means the economy is growing almost twice as fast under Trump as it did under Obama. One of the reasons higher economic growth is so important is if you can raise the economic growth rate to say 3% from 2%. That additional one percentage point may not seem like a big deal, but over a decade, that leads to about $3 trillion more federal and state and local tax revenues, because people if they're working, if businesses are profitable, they pay more taxes.

Moore: If people are shopping for things, you get more sales tax revenues. The growth is the best way to bring down our debt and deficit, and we're going to start to see that under Trump. I like to look at jobs, I like to look at wages, because this, as you said, Tim, how does this affect the average American? They can see this in the openings for jobs in businesses, we now have 5 to 6 million more job openings than we have people can fill them. That's kind of a nice problem for economy to have, unless you're the businessman or woman who's trying to find those workers. We're starting to see wages rise, and that was the intention of the tax cut, by the way, wasn't to help rich people.

Moore: I mean, I love rich people, we all want to get rich, we want more rich people. But the intention was really to create a labor market to get more businesses investing as a way to lift wages, because for 20 years, wages have not really budged up for middle class workers. We're starting to see those rise a little bit. I think as the labor market gets tighter, business are going to have to start offering workers more pay, and incidentally, you see this in wages, and bonuses. If you see the official statistics that are looking at wages, the big [inaudible 00:06:39] all wages aren't rising. They're raising a little bit. But one of the things that that doesn't take into account is bonuses.

Moore: There are 6 million workers who've gotten bonuses everywhere from $1,000 to $3,000 to $4,000. That's a big increase for somebody who's making $40,000 a year to give them a $2,000 bonus. I think the condition of the American worker today is very strong, and boy has it changed over where it was two, three, four, five years ago.

Doescher: Stephen, last year you wrote that if we really want to see a healthy economy, we need real and sustained growth of 3% to 4%. You agreed with Trump that with the right policy we can reach these numbers. But many economists on the left, including Paul Krugman, Larry Summers, and Austan Goolsbee don't.

Moore: Why does anybody really listen to Paul Krugman, or Larry Summers, or the faculty of Economics at Harvard or Yale? They completely misread the economy. They said if Trump is elected, we're going to get a second Great Depression. Now we got the strongest economy in 25 years. They couldn't have been more wrong. It's like getting in a plane and you're flying to California and you end up in Kazakhstan. That's how wrong they were.

Doescher: Big mistake.

They said if Trump is elected, we're going to get a second Great Depression. Now we got the strongest economy in 25 years. They couldn't have been more wrong. It's like getting in a plane and you're flying to California and you end up in Kazakhstan. - Stephen Moore    

Moore: Yeah, and a big mistake. I think those people should show a little humility and just say, "You know what? We were wrong." By the way, I'm not always right, you know me for a long time, Tim. I make mistakes, I made wrong predictions. I remember when Clinton was president, I said, "This isn't going to work." We had very strong growth, and I said, "You know what? These policies are working pretty well." So yeah, we can do this. Now the argument that is made, even by some of our friends, is like the economy is running out of steam, that it's a long recovery and it has been, I think it's one of the longest recoveries we've had.

Doescher: Since 2008, you're saying the recovery …

Moore: Yeah, exactly. That's right. This is now a nine year recovery. That's a long recovery without a recession. People say, "Well, a recession has to be right around the corner." The reason I don't believe that's true is because, yeah we had a recovery under Obama, but you and I wrote these papers, it was the weakest recovery we ever had for a lot of Americans and places like Michigan, Ohio, and Pennsylvania, Wisconsin, West Virginia, and Kentucky, there was no recovery.

Doescher: Let's talk about different measures of the economy. Is GDP the entire picture? I know you talked briefly about the labor market, things like that, can we still have a healthy economy if we don't sustain a 4.1% growth rate? Can we do that? Can we settle for 3%? Can we settle for 2.5%? Where would you be comfortable? Where would you be happy?

Moore: I'm going to sound like Donald Trump and say I want 5%. Let's aim high. There's no reason ... we laugh at that, and yet, when John F. Kennedy was president, he cut taxes, we had 6% growth for three or four years. When Reagan cut taxes, and deregulate the economy, we had quarters of 8% growth, 8%. We're talking about 4% growth being a great number, can you imagine 8.3%? There's no law of economics, or law of physics, that says the economy can't grow faster. If you have more business investment, if you have more people working, if you have more invention and entrepreneurship, you get more growth. One of the things that's happening now is we're sucking capital in from the rest of the world.

Moore: I always say, in a global economy, whatever country gets the most capital wins. We're doing that now, because we have a very pro-business environment here, and so yes, this is sustainable. I would like to see growth up in the 3% to 4% range for a long time. Now, one thing I will say that is very flawed with the GDP numbers that we've talked a lot about at Heritage is guess what is one big component of GDP?

Doescher: Government spending.

Moore: Government, yeah. Government is a negative for the economy, not a positive. We should probably subtract government from GDP. If you got a big boost of government, and unfortunately, unfortunately in the first and second quarter of this year, government grew. That was this illusion that economy is growing, but as my colleagues here say at Heritage, every dollar the government spends is the dollar that's subtracted from private sector. The government doesn't create anything. That is something that's a little bit concerning, is the government's growing too fast. Incidentally, state, local government grew too. Why is that happening? Because the economy is booming, state and local governments are getting more receipts, and what do you think they're doing with that money? They're spending it.

Doescher: Let's talk a little more about what this growth means for [inaudible 00:11:56] America. Heritage recently released numbers that say, "A family of four will save nearly $3,000 per year, or almost $45,000 over the next 10 years because of the GOP tax cut." How are policies like tax cuts and regulation reduction playing a role here?

Moore: Tim, I mean, those numbers you're talking about are just crumbs. Come on. Joking folks, that's Nancy Pelosi. (laughing)

Doescher: I believe you're referencing Nancy Pelosi.(laughing)

Moore: Those are very significant numbers for a family that makes $40,000, $50,000, $60,000, $70,000 a year. [inaudible 00:12:28] $2,000 or $3,000 in income. I've literally met people on the street who come up to me and they'll say, "Gee, I know you worked with Trump on this tax plan, and I just got a $1,500 bonus from my employer." These are people who, you know, lower, middle class people, who are doing service jobs and so on. That's a big deal. If you're like Nancy Pelosi, and you've got 12 acres and you've got a swimming pool and a mansion, that doesn't add up to much, but for working class people, that's a lot of money.

Moore: This is the idea of creating a rising tide that lifts all boats. As we speak, I'm looking at a New York Times headline that says, "The US Treasury is weighing up $100 billion tax cut for rich people." That's ridiculous. We're talking about a reduction in the capital gains tax that will,   indexing it for inflation, that will add to the capital stock in America, more business investment, it'll allow people to sell the assets they have now and redeploy in new businesses, and new startups, and new technology companies. How is that bad for America? How is that a tax cut for rich people? That's a tax cut for working class people and incidentally 100 million Americans own stock. How is this just for rich people?

Doescher: Okay. One last question. In all your experiences with Trump since you began working with him on the campaign until now, what is your most memorable story?

Moore: I was out at Mar-a-Lago in Palm Beach with ... the president was there. This was a month or two ago. I had the occasion to just chat with the president for three or four minutes. I came up to him, and kind of tapped him on the shoulder, because I came up from behind and, "Hey, Stephen, isn't this tax cut the most unbelievable thing?" He's a very cheerful guy. I just said, "Mr. President, this stuff is working even better we thought it would." I just said to him, I knew it was going to help growth, but I didn't think we'd get to 4% so quickly. He just turned to me with a big smile, he said, "Stephen, you ain't seen nothing yet." How's that for a happy ending?

Doescher: That's awesome, Stephen. Thank you so much for joining us.

Moore: Thanks, Tim.