It's far and away the biggest unknown facing the country now that Donald Trump has won the presidency: Will he end the war against the economy?
First, we should acknowledge that the economy is not what it should be. Certainly, that is the perception of many if not most Trump voters. But, you say, the unemployment rate has steadily declined under President Obama, from a peak around 10% in 2009, to where it is now down under 5% (actually, it's 4.9%) in the most recent report. Isn't that a good measure of full employment? Not really. As many have noted, even though what the BLS reports as the unemployment rate is in what should be "full employment" territory, something else called the "labor force participation rate" (LFPR) is telling a different story. The LFPR (number of employed plus those seeking work divided by all population age 16 and up) was over 66% prior to the recession, and today remains below 63%, a decline of about 3.5%. Total population 16 and up is around 240 million, so that 3.5% represents around 8 million people, a number which actually exceeds the number reported as "unemployed." If you were to add that additional 8 million working-age people into the labor force, suddenly the unemployment rate would be right back at 10%. So there is every reason to think that there is serious sluggishness remaining in the economy, even after what is now over seven years of the Obama "recovery." Those 8 million people, although reported as not seeking work, are still an overhang on the labor market, and probably are the big reason why we still don't see labor force tightness forcing wages up. (Has the Obama Labor Department been reporting the unemployment rate honestly? I seriously doubt it, but I have no way to check.)
So why is there this significant sluggishness after seven years of a recovery? Many progressive commentators say they have discovered a so-called "new normal" in how the economy works. Things are just so much more complex today than they were in the innocent past! Automation! The internet! Or, you could buy into the Trumpian narrative: The Chinese and Mexicans have been stealing our jobs. It's free trade and immigration that have undermined our economy!
The problem with both of those narratives is that increasing complexity, automation, free trade and immigration have all occurred in the past and never been inconsistent with a robust economy and full employment. Nothing about any of those things should prevent a free economy from reaching full capacity at most times. But there is something else that can keep an economy permanently sluggish, namely the active hindering of economic activity by a predatory government. Which we have had in spades under Obama.
I have written several posts in the past about what I have called Obama's "War Against the Economy." For example, here is a long post from 2013. Any one of Obama's individual initiatives might be something that you actually support. But if you look broadly at the full range of Obama's policies that have made doing business more difficult and more costly, it kind of takes your breath away. No wonder the economy is sluggish!
- Energy. They have stopped pipeline construction. The EPA has attacked the coal industry on all fronts. Development of fossil fuel resources on federal lands is obstructed with every device they can think of. They hand out wealth-destroying subsidies to uneconomic "renewable energy" companies. Multiple regulations seek to intentionally drive up the price of electricity.
- Obamacare. Obama promised that his signature act would cut the cost of health insurance, while his critics said that economics can't work that way and the cost would shoot up. The critics have been proved right. The Act has vastly increased federal spending, while creating powerful incentives for small companies to stay under 50 full time employees to avoid cost-prohibitive mandates.
- Regulation. An explosion of complex and expensive regulations has made "compliance" the biggest growth industry in the U.S. -- an industry that adds exactly zero to the wealth of the people. As the most notable example, the multi-thousand-page Dodd-Frank law to regulate the financial industry has made it next to impossible for small banks that cannot afford hundred-lawyer compliance staffs to continue to exist. For the first time in the history of the country, banks are not lending to their full lending capacity, and sit on massive "excess reserves."
- Labor Department. Huge numbers of employees have been added to the ranks of those covered by inflexible strictures like wage, hour and overtime rules. The NLRB has purported to outlaw the franchise business model and make franchisors the employers of all who work for the franchisees.
- Government spending and debt accumulation. Spending went up by about $1 trillion per year in the early years of the Obama administration, as a supposed "stimulus," and then never went back down. Was any of the added spending productive? Not that I noticed. Bonded debt about doubled, from about $9 trillion to $18 trillion. There was no effort whatsoever to reform entitlements.
- Increasing handouts. While traditional welfare (now going by the acronym TANF) has remained fairly steady under Obama, other handouts like food stamps (SNAP) and Social Security disability have exploded. These things come with powerful incentives to the recipients to induce them to not work, or work less, or at least not report their income to the government.
This could go on, but you get the picture. In the aggregate, these initiatives and many others like them constitute a very major drag on economic performance. Getting rid of all these drags on the economy is what could get the extra 8 million people employed. Starting a trade war won't accomplish the job, and indeed would almost certainly make things worse.
Professor Richard Epstein last week published an "Open Letter to President Trump" at the Hoover Institution web site. After recommending in the strongest terms to avoid a trade war, here are the guts of Epstein's advice:
[T]he campaign to deregulation domestically has to take place through all the government agencies, whether they deal with environmental, securities, communications, trade, or any other issue. We do not need the clean power plan in its current form, or for that matter, the clean water plan; we do not have to get detailed information, world-wide, of the wages of the median worker; we do not need programs of net neutrality; we do not have to have the Consumer Financial Protection Bureau (whose head, Richard Cordray, you are now entitled to sack) to run roughshod over various credit markets. There is here a relatively simple prescription: whatever the Obama administration has done by regulation, undo.
There are, of course, many issues that cannot be done by executive order, and you should not try to imitate the worst Obama abuses in unlawfully expanding your authority. But it should be painfully obvious that the two major legislative mistakes of the Obama administration have to be [un]done by ending the various mandates under the Affordable Care Act—a horrible misnomer—for the individual and employer markets. There will clearly have to be something to put in the void, for which the Healthy Indiana Plan is a good place to start. And clearly something has to be done to remove most of the key provisions of the Dodd-Frank legislation that causes far more mischief than it prevents. And we must move to follow the world-wide practice of allowing the repatriation of profits earned abroad by American firms without a new round of corporate taxes.
Anyway, with Hillary as President, none of this would have been a possibility. With Trump as President, at least we can have some hope.