The Great GOP Stimulus

The 2018 Trump stimulus exceeds the Obama-era stimulus package in size – will it pay off at the top of the economic cycle?

In 2010, when Barack Obama pushed for a stimulus package to help boost the American economy, it was decided by many in the GOP as wasteful spending. While there are more productive (infrastructure) and less productive¬†(tax rebates) ways to stimulate the economy, any form of spending (or tax cut) is a form of economic stimulus – this is a point agreed by both economists and businessmen like Warren Buffet. In fact, any form of budget deficit is a form of stimulus, as the government borrows (or prints) money that it doesn’t have to spend it into the economy.

The past year has seen the GOP enact not one but two stimulus measures – first a budget which ended Obama-era budget caps and boosted spending by roughly $150B per year, and second the tax cut which reduces taxes by another $150B per year. Taken together these measures are adding roughly $300B per year in stimulus to the US economy, potentially adding 1.5% to GDP for each of the next few years. Adding this stimulus to a core GDP growth rate of 2-2.5% might thus make 4% possible in the near term, with the bill due much later. The total federal (non-central bank) stimulus under President Trump’s first will hit at least $1.2 Trillion, exceeding President Obama’s 2010 stimulus package by $350 Billion [1], but this time at the top of the economic cycle!

What does this tell us? A few key takeaways emerge:
  • While most economists agree that it’s better to do fiscal stimulus when the economy is at or near recession, democracies don’t work this way, and there’s little correlation between economic need and actual governance.
  • When either party has complete control of government, they take the opportunity to spend on favored initiatives – in Trump’s case the DoD received most of the benefit, while in Obama’s case a variety of energy efficiency, infrastructure, and other initiatives were funded.
  • Budget deficits haven’t been a major issue over the last decade, but the tax cuts in particular will layer on top of Social Security and healthcare spending trends to drive debt-to-gdp well past 100% [2].
  • The best stabilizers in the US economy (unemployment insurance) are effectively automated – extending this sort of stabilizer to infrastructure spending (spending more on transportation funding etc as unemployment rises) would not just help buffer downturns – it would also get taxpayers a better deal.

Time will tell whether the GOP’s late-cycle spending will extend the business cycle substantially, but in the long run US policy will improve if more of these decisions are put on auto-pilot, removing the uncertainty of the political winds and the desire to spend at the least opportune times.

 

[1] The Obama administration stimulus plan cost around $850B in the end, including only the 2010 Stimulus measure and its implementation. Extension of Bush-era tax cuts and similar are not counted here, as these were extensions of existing measures, rather than new tax cuts or new spending as in the Trump administration’s recent moves.

[2] Many charts and news reports on the debt refer only to the publicly-held portion of the US debt, but when debts to the Social Security trust fund are included as in this data from the Federal Reserve, the US debt-to-gdp ratio already exceeds 100%.

Election 2016: Democrats Score an Own-Goal

Donald Trump won the 2016 presidential election, but he didn’t win the election. Hillary Clinton scored an own-goal – she turned out the lowest share of voters of any Democrat since 1996, and was bested (in vote share) by numerous losing Democrats of the past. See fine candidates of the past like Kerry, John, and Gore, Al. Contrary to much current analysis, Donald Trump didn’t really expand his base – he performed about as well as a generic Republican, while Clinton under-performed badly. The CNN chart below shows candidates’ share of eligible voters since 1996 [1]:

https://i1.wp.com/i.cdn.turner.com/cnn/.e/interactive/html5-video-media/2016/11/10/turnout_full_scale_all_voters_v2update.png

  • GOP vote share peaked in 2004 and has been bleeding down steadily, losing about 1.7% in total vote share per election since 2004 [2]. Trump actually under-performed this downtrend, as he dropped 2% (from 28.3 to 26.3) versus the average drop of 1.7% per cycle for Republicans. The GOP seems to turn their base voters out steadily, but this base forms a shrinking percentage of the electorate as the US becomes more diverse.
  • Democratic vote share has been more volatile, reaching a peak in 2008 and bleeding down after. But Clinton didn’t need to match Obama’s 2008 or 2012 performance to win – matching John Kerry or even Al Gore would have been sufficient! John Kerry’s performance, at 30% of eligible voters, would have crushed Trump, while even Al Gore’s 27.4% would have provided the small margin needed in the Midwest to win the election. In a low turnout election, Clinton bled off roughly 4% points of vote share, while Trump bled off only 2% points, leading to his narrow electoral college win.
  • Neither 3rd party votes [3] nor Trump’s numbers explain Clinton’s collapse – Clinton and the Democratic party have only themselves to blame for frittering away more than 100% of Obama’s net gains! Democrats tend to win when they increase overall turnout, and the data show clearly that turnout collapsed in the 2016 election.
  • Had Hillary Clinton managed to turn out any of the urban vote in the Midwest, or gotten millennials excited, she’d have been fine. She did neither, and in absolute terms had the worst performance for a Democrat since her husband, ironically (who won handily in 1996 in a low turnout election).

In short, I blame Democrats and the Clinton team in particular for this loss far more than I credit Donald Trump. According to the data, he likely performed just below a more typical GOP candidate, while Clinton greatly under-performed the last four Democratic campaigns.

Silver Linings For Democrats:

  • Arizona is rapidly trending blue – more rapidly than expected. Obama lost Arizona by around 213,000 votes in 2012, while Clinton lost by only 85,000 votes in 2016. This aligns with a 2014 study on demographic change, putting it right on track to lean blue in 2020.
  • Winning just Arizona’s and Florida’s (whose demographics are also shifting) 40 electoral votes replaces all the rust-belt states Clinton lost, creating a 272 electoral vote win.
  • Who voted in 2008 that didn’t turn out in 2016? Young people and minorities. Democrats win when turnout is high. Turnout is high when the most progressive parts of the Democratic base are excited. Therefore, Democrats’ direction should be clear – there is no one left in the center, and it’s time to move forward with the progessive wing of the party.
  • Had Democrats won in 2016, winning again (four in a row) would have proven even more impossible given the tick-tock nature of the Presidency in the US. Since FDR, one party has won three straight presidential contests only once, in 1988 – and none have won four straight.

[1] Votes are still being counted, and the final tally will likely show Clinton’s vote share edge close to 27%, still below Al Gore’s 2000 performance.

[2] Per the chart above, McCain lost 2.4% points from Bush 2004, and Romney lost another 0.8% points from McCain. Trump lost roughly 2% points from Romney – leading to an average decline rate of just over 1.7% per election cycle. Mr. Trump lost more than this amount, leading to the conclusion that he might have under-performed relative to an “average” GOP candidate.

[3] Above, we see that in 2016 voter turnout was around 55.4%, with 52.8% captured by the two mainstream parties. If all 2.6% lost to third parties came from Clinton voters (and it almost certainly dd not), that still implies that she under-performed Obama 2012 and Kerry 2004 by around a percentage point – and this assumption is far too generous to Clinton.