If Trump Weren't President, What Would His Critics Say About This Economy?

Tax reform critics insist the economy is “not good,” all evidence to the contrary notwithstanding. Pity their predicament. Lauding the economy means crediting the policy driving it — lower taxes — and the politics that produced it, in particular President Trump. Finding neither palatable, a flaw must be produced; yet in creating one, critics must ignore their own recent argument and facts about America’s labor force.

Perhaps the stock market has been over-bought and recent reverses represent a compressed correction. However, it is unquestionably overwrought with self-contradictory concerns that would interpret success as failure. Here, tax reform critics’ fingerprints appear prominently.

They cannot call the economy bad, because that would not pass any plausible eye test. Nor can they call it “good,” or that gives credit to the tax cuts and president they oppose.

Even describing current performance as a return to normal (which it is: The U.S. economy averaged real GDP growth of 3.3 percent annually from 1946-2000) presents problems.

Calling the current economy “normal” begs the question about its predecessor’s much slower growth. From 2001-2016, America’s real GDP averaged just 1.8 percent growth, and just 1.5 percent from 2009-2016. Both present problems, especially the higher tax version of the Obama years: Tax reform critics cannot have that period labeled slow, which they until last year’s success were calling “the new normal.”

Left with few options for “not good,” they have seized on it being in effect too good. They argue: Tax reform has hyper-accelerated the economy. The result is an excessive demand for labor in an already full employment period, which in turn results in inflationary pressure.

Unraveling this Gordian knot of the “not good” economy requires unwinding one glaring contradiction and an obvious omission.

First, today’s tax reform critics were the same assembly just recently lamenting slow wage growth for America’s earners. Their mantra was the rich had gotten richer, while everyone else’s income stalled. Their proposed solution was tax increases on the rich.

Yet now that wages are growing — exactly what they had professed to want — this has inexplicably become a bad thing. When wages were not growing and their call was for them to do so, there was no concern about inflationary pressure. Now that wages are growing, they are a problem, not the panacea they once were.

The key point to tax reform critics’ new concern is “full employment.” However, this should not be simply accepted without understanding its true context.

Granted official unemployment stands at just 4.1 percent. However, the labor force participation rate underpinning this low rate is comparatively even lower at 62.7 percent.

To put today’s low labor force participation rate into perspective, when Obama took office in January 2009, it stood at 65.7 percent. The three percent drop (it would actually bottom out at 62.4 percent in September 2015) took it back to — aside from the Obama years — a level unseen since 1978, when women’s entry into the workforce was still causing its extended rise.

Despite being at roughly a four-decade low, three percentage points may not seem like a big difference. However it has a big impact on unemployment. If today’s labor force participation rate equaled 65.7 percent and employment levels stayed the same, official unemployment would be double today’s at 8.5 percent.

For tax reform critics looking strangely askance at the rising wages and low unemployment they until recently wanted, they are taking an even more skewed view of the labor force participation picture. Only with sustained wage growth can America begin to pull back into the workforce those driven out by preceding years’ slow growth. In other words, the cushion tax reform’s critics seek in the workforce, needs to first return to the workforce.

Tax reform critics are determined to not give President Trump or tax reform a win.

Trump creates a short-term political problem for them: Giving him credit explicitly helps someone they oppose and implicitly indicts someone they supported: Obama.

Much more troubling for them is the longer-term economic issue. Crediting tax reform for a strong economy explicitly helps a policy they oppose. It also tacitly condemns the higher taxes and lower growth that preceded it for eight years. And a dramatically attributable success could create credibility for lower taxes that would long outlast Trump’s presidency.

Tax reform critics’ convoluted creation of the “not good” economy must be treated like the Gordian knot of antiquity. As Alexander the Great decisively determined, it needs cutting — just as taxes needed to be to unleash and return America’s workforce to its former earnings and size.