There's no getting around it: The economy is doing better now than before President Trump took office. The jobs report last Friday detailed a solid 250,000 new jobs, a working-age labor force participation rate that is finally getting into healthy territory, and wage growth that is finally approaching pre-2008 levels. Of course, all of that is peanuts compared to corporate profits, which are sailing off into the stratosphere.
But why are things even moderately good? The answer, uncomfortably for liberals, is almost certainly the Trump tax cuts, which delivered a dollop of fiscal stimulus. While it does not mean the tax cuts were good policy, they do prove beyond question that post-2008 austerity was a wretched decision that badly harmed the American people.
So first, a bit of background. In early 2009, right in the pit of the Great Recession, congressional Democrats passed a large fiscal stimulus in the form of the Recovery Act. The idea is that when the rest of the economy is suffering a self-perpetuating collapse in aggregate demand — where job losses leads to less spending and even more job losses — the government should step in to fill the gap. By spending on infrastructure, research, and social benefits — or cutting taxes — people will have more money to spend, thus increasing demand and growth. And while the 2009 stimulus was far smaller than the estimated size of the gap it was supposed to fill (which would later turn out to be even larger than was known at the time) it did stop the collapse and start a process of recovery.
But starting in early 2010, the government pivoted to austerity, cutting spending and slowing the economy. As a direct consequence, the ensuing recovery was grindingly slow and weak. Instead of rebounding to the pre-2007 growth trend, the economy struggled along just above stall speed year after year. And because high unemployment made the Democrats lose their House majority in 2010, the only thing that could be passed was more austerity.
In 2016, of course, Republicans won complete control of government. They promptly embarked on a robust fiscal stimulus, dramatically stepping up government spending and slashing taxes on the rich. The result has been a sort of economic boomlet, with growth steadily ramping up from a low of 1.2 percent in the fourth quarter of 2016 to over 3 percent in the third quarter of 2018.
Now, it's important to emphasize that the Trump tax cuts were about the worst kind of fiscal stimulus that exist. Studies on the "multiplier effect" — that is, additional knock-on spending resulting from the initial stimulus dollar — show tax cuts tend to have a much smaller multiplier than direct spending. Tax cuts exclusively for the rich are even worse, because they are correspondingly more likely to be saved instead of spent. Economist Josh Bivens suggests that in terms of stimulus, about 80 percent of the Trump tax cuts were pure waste.
It's also important to emphasize that the tax cuts absolutely did not work the way conservative economists said they would. In accordance with supply-side economics, their theory was that the tax cuts would incentivize investment and thus stoke growth. This has not happened at all — on the contrary, investment is basically flat from the pre-tax cut days, while profits, stock buybacks, and dividends have surged. (Basically, the rich just pocketed most of the money.)
Instead, the tax cuts worked according to the liberal Keynesian grounds outlined above: by putting more money into the pockets of consumers. And in another knock to conservative dogma, there is not even a whisper of a sign that the economy is overheating — where stimulus merely sparks price increases instead of more growth and jobs. On the contrary, inflation remains totally quiescent.
After the 2016 election, some liberals turned against stimulus. A month before Trump was sworn into office, New York's Jonathan Chait portrayed more fiscal stimulus as highly questionable, something "only the most indiscriminate Keynesian — what economists used to call 'vulgar Keynesians' — would deem suitable" because unemployment was at a low 4.6 percent. Well, unemployment is now at 3.7 percent, and there is no sign whatsoever that the United States is out of room to juice the economy even further — especially if it was done in a more intelligent fashion than simply stuffing money into the pockets of the ultra-rich. That will be doubly true if the economy stumbles in the future.
Future Democrats must remember this lesson and not repeat the mistakes of Barack Obama.