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What is the source of America’s economic growth?

By Libbi Wu
web posted October 22, 2018

Is the strength of our economy due to President Trump’s tax cuts, restrictions on immigration, or reduction in regulations? Many of my homeschooled and typically Republican friends argue that our current economic state is due to Trump’s actions while in the liberal Silicon Valley many refuse Trump’s hand in this and argue that Trump inherited an economy that was already moving towards growth. Robert Shiller contends in his recent article “The Economy Grew Even Faster in Truman’s Presidency. So, What?” that the true sources of economic growth did not stem from the actions of Truman or Trump during their presidencies but rather from changes in consumer preference, confidence, and expectations. Ultimately, many factors contribute to economic growth, and the actions of the presidents only partly influenced the success of the economy whether in a positive or a negative way.

Economic growth is defined as the “process through which an economy achieves an outward shift in its production possibilities curve” (RT). Whenever the factors of productions, such as capital and labor, increase in quantity or quality and whenever technology improves, economic growth takes place. In the past, increases in the quantities of capital and labor contributed more to economic growth than improved quality of factors of production and technology (RT). However, the trend changed starting from 1995-2002 where 30% of economic growth stemmed from increased quantity of factors of production and 70% from increased quality in the factors of production and technology (RT). The policies that encourage economic growth tend to reduce consumption in order to increase factors of production like capital and human capital. Since Trump was elected in 2016, the economy has grown quite significantly. The American stock market “is up more than 30 percent. Single-family home prices are up more than 10 percent and real growth in the gross domestic product for the second quarter reached 4.1 percent annualized. In May, the unemployment rate fell to 3.8 percent; it hasn’t been lower since 1969” (Shiller). But with many elements that contribute to economic growth, could this just be correlation and not causation?

Shiller’s stance is that Trump’s actions have not been the source of our strong economy. Rather, it has been “driven by changes in individual day-to-day economic decisions” (Shiller). For the stock market, Shiller explains that sale fluctuations “can have an amplified effect on share prices” (Shiller). Relative to our economic growth since 1947, our current GDP growth is not unusual. In addition, Shiller notes that tax cuts did not spur growth in Truman’s presidency, and in the same way, Trump’s tax cuts have not significantly contributed to our economic growth. Tax cuts only temporarily lead to increased GDP because of increased consumption but do not actually cause economic growth by changing our factors of production. Moreover, protective tariffs also did not cause the growth in Truman’s time as the General Agreement on Tariffs and Trade was reducing tariffs starting from 1948. In fact, many economists contend that Trump’s protectionist tariffs are counterproductive and threaten our strong economic growth. Trump’s restrictions on immigration as well is not behind our economic success. According to a study by the Citigroup and Oxford University, since 2011, immigrants “have driven two-thirds of U.S. economic growth” (Newsweek). Finally, some claim that Trump’s reduction in regulations are the source of our economic growth. Although certain kinds of deregulation such as for workers can increase human capital by reducing paperwork and licensing, that is far from the main source of economic growth.

What likely caused the economic boom in the 1950’s “was bad news...on, Aug. 29, 1949, the Soviet Union detonated its first atom bomb, ending the brief nuclear monopoly of the United States” (Shiller). This bad news led to increased investment which led to economic growth. Because of the fear of bombs, demand increased for suburbs, vacation homes, and farms as protection from an atom bomb. Because of the increased demand, quantity supplied increased, so home building was stimulated. Although residential investment had already been high after World War II, the atom bomb along with fear from the Korean War led to even greater investment and led to an “epidemic of ‘scare buying’ of automobiles and many other products that might be hard to get during a global war” (Shiller). This historical example of the impressive growth in 1950 reveals how it was not the government actions that led to great economic growth. Rather, it was fear that led to a change in consumer preferences for various goods. Currently, consumer expectations or fear of facing higher interest rates from central banks has led to increased purchases of houses or cars. Since trade wars often lead to higher prices, consumers have also purchased more “soybeans, steel and many other commodities” (Shiller) since they expect future trade wars with Trump’s tariffs.

Last June, my sister and I along with our mom visited relatives and colleges in New York. We rented a car, and the car rental folk gave us the option of paying our gasoline at a set price of $3 per gallon to fill up our gas tank once we returned the car. Since the price of gasoline in California where we live was much higher, $3 seemed like a great deal. Because we expected higher prices on the road, we agreed to the current price of $3 so we wouldn’t have to pay for higher gas prices in New York. However, we had no idea that the price of gasoline in Ithaca was actually below $3! Consumer expectations play a large role in the economy, and while it may appear at first that Trump’s tax cuts, restrictions on immigration, and reduction in regulations have caused our economic growth, what has actually happened is that the economy has grown despite Trump’s actions and protectionist policies because of consumer expectations of trade wars and higher interest rates along with improved quality and quantity of factors of production and improved technology. ESR

Libbi Wu is a high school student studying AP Macroeconomics. © 2018 Libbi Wu.

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