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Flawed US recovery splits Trump and Obama camps

Having publicly trashed the US economy’s performance during the presidential campaign, Donald Trump has become its most prominent cheerleader.

The president-elect has in recent weeks claimed credit for surging consumer confidence, stellar equity prices and stronger end-of-year household spending, arguing there was “no hope” before he arrived on the scene.

To Barack Obama’s supporters, claims from Mr Trump that the US was cloaked in economic gloom before November 8 are risible.

The seeds for accelerating wages, full employment and rebounding housing equity were laid in 2009 during the financial conflagration, they argue, with the subsequent recovery trouncing those of other advanced economies and forming the cornerstone of the outgoing president’s legacy.

Yet while today’s US economy is indeed dramatically stronger than the one Mr Obama inherited, the recovery remains a flawed one, riddled with socially dangerous levels of inequality and hobbled by poor productivity growth.

Some analysts fear it is an inheritance that Mr Trump could shatter if he embraces hazardous policy choices such as barrelling into a trade war with China.

Mr Obama took on an economy in freefall in January 2009. Mr Trump, by contrast, will next week inherit a country with per-capita GDP that is 4 per cent higher than its pre-crisis peak — outpacing recoveries in economies such as Japan and the euro area.

Real household income growth in 2015 was a record-breaking 5.2 per cent, the stock market is flirting with all-time highs and house prices are close to recovering the losses they suffered in the worst housing crisis since the Great Depression. Since the start of the 1980s no incoming president apart from George W Bush has arrived to a lower unemployment rate. 

“The economy was on the brink of a second Great Depression. It wasn’t automatic that we would come back from that. A lot of policies and specific choices went into making that happen,” said Jason Furman, chairman of Mr Obama’s Council of Economic Advisers, in a briefing in December.

When setting out the drivers behind the rebound the White House points not only to the fiscal stimulus provided by the Recovery and Reinvestment Act of 2009, but also to the financial rescues begun under Mr Bush and continued by Mr Obama and 2009 bank stress tests.

Among the other ingredients were aggressive Federal Reserve easing and auto sector rescues. If Congress had not attempted to clamp down on the budget deficit in 2012, the administration believes the recovery would have been even more pronounced. 

The most obvious rebuttal to the White House’s own glowing verdict is the presidential contest itself; if elections are in part at least a referendum on a party’s economic policies, Mr Trump’s victory represents a repudiation by many American citizens. Both sides claim credit for signs of cheer as focus turns to challenges ahead

“The idea that [Mr Trump] is inheriting the Garden of Eden is spin from the left,” said Steve Moore, a former adviser to the campaign and Heritage Foundation chief economist. “If everything is so wonderful about the economy, why did Hillary [Clinton] lose?”

Economists such as Alan Krueger, one of Mr Furman’s predecessors on the Council of Economic Advisers and now a Princeton professor, reject this argument. He argues that it is only after a crisis has subsided that voters feel confident enough to reject the status quo — and that in any case Mrs Clinton won the popular vote by nearly 3m.

“By any measure the US economy has greatly improved over the last eight years and has outperformed the rest of the world,” said Mr Krueger, “With the benefit of hindsight the president’s record and the performance of the economy will probably look even better.”

Still, even the president’s allies do not deny the vulnerabilities that remain in the US economy, among the most important of which is inequality. As Mr Furman’s report for the president showed, the top 1 per cent in the US population clinches a far larger share of income than in the other G7 countries.

While real household income growth jumped in 2015, analysis from the Economic Policy Institute shows that the bottom 95 per cent of households still had incomes that year that were lower than in 2007. 

Among the key constraints on future income growth is poor productivity. Doug Holtz-Eakin of the American Action Forum, a former economic adviser to John McCain’s presidential campaign, argues this presents Mr Trump with a weak hand: “The key character of the economy he inherits is poor trend growth, which is the same as poor productivity growth, which is the same thing as poor real wage growth.”

Addressing these longer-term weaknesses will require careful policy choices. Some analysts worry a Trump-led shift towards protectionism could instead propel the country into a trade war that shakes business confidence, even as the president proffers business-friendly policies such as deregulation and pledges to engineer growth rates of 4 per cent or more.

Ethan Harris, global economist at Bank of America Merrill Lynch, describes an escalation of China-US trade tensions as the biggest threat to the global economy this year.

While Mr Trump’s arrival appears to have given a sharp lift to confidence, his original package of tax cuts is heavily skewed towards benefiting rich voters, which will do little to alleviate inequality. Among the other risks analysts cite is that the administration and Congress end up pursuing overly lax fiscal plans at a time when the US is already at full employment. 

“Barack Obama is leaving Donald Trump a strong economy with few risks on the horizon apart from ones that might arise from choices made by Congress and the Trump administration itself,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.

“Among the policies one would hope they avoid are excessive fiscal stimulus and protectionist trade measures. At this stage we do not know whether they will go down either route.”

Additional reporting by Shawn Donnan

Via FT