It was recently reported that in the second quarter of this year, the economy grew at more than a 4% rate. And it appears the growth rate is accelerating this quarter.
At the end of October, the Commerce Department will likely report that the economy grew at a 4½% annual rate in the third quarter of this year.
Who gets credit for this?
The mainstream media (MSM) is now reporting that President Donald Trump should not get the credit for the strong economy. It is really President Barack Obama who should get the credit. They say that Obama inherited an economy in deep recession. He stopped the recession and grew the economy.
The MSM argue that since the recession was so deep it took seven or eight years to fully rebound. It took until 2017 and now 2018 to show Obama’s policies worked and he should be given the credit.
The reality is that had Obama done absolutely nothing regarding economic policy, the economy would have recovered much quicker and be much stronger. All of Obama’s actions either had no significant impact on stimulating growth or his actions actually slowed growth.
It is worthwhile to note that Obama was the first and only president in history to serve a term in office without having at least one year where the economy grew by at least 3%. He averaged just above 2% growth. Since the population grows at almost 1%, he really had almost no growth.
To end a recession, every economist will advise to take actions that stimulate economic growth. This can be accomplished by using monetary policy, fiscal policy or both.
The recession ended primarily because the monetary policy of the Federal Reserve, which operates independent of the president, massively increased the money supply and dramatically reduced interest rates to near zero. This should have caused the economic growth to accelerate rapidly.
But the economy didn’t experience strong growth. Why?
In order for monetary policy to be effective, there must be a multiplying effect. The multiplying effect occurs when banks make loans which further expands the money supply and further increases economic growth.
The problem was that Obama was more concerned with curing perceived social injustices. It was, he reasoned, an injustice that banks made loans to people who freely applied for them but really could not afford them. To stop what Obama referred to as predatory lending, he had Congress pass the Dodd-Frank bill. This law not only stopped predatory lending, it virtually stopped all lending.
Without banks making loans, monetary policy doesn’t work.
Obama had Congress pass the most simulative increase in fiscal policy ever. Congress passed a massive near $1 trillion stimulus package that also failed to stimulate the economy. The reason was simple.
For increases in government spending to be effective there must also be a multiplying effect. The government spends money. That should create new income for the receiver of that spending who then spends the new income, creating income for the next receiver.
Obama geared his spending toward social issues. As an example, he spent money on the solar panel industry, but consumers did not buy the panels. Result: no multiplying effect.
Obama spent money to increase food stamps and welfare payments and provide free health care to low income earners.
While that may have helping total spending, it discouraged people from working. The result was a historically low labor force participation rate, which was a drag on economic growth.
His tax policies also slowed growth.
Obama’s Affordable Care Act (ACA) raised taxes on the middle class, by imposing special healthcare taxes. The ACA had 23 different taxes that were either new or raised the rate for existing taxes. Higher taxes reduce consumer spending and slow economic growth.
In 2011, Obama also raised taxes for the highest income earners by 10%. This reduced capital formation and tended to slow growth for our capital intensive economy.
The ACA also forced businesses to pay for healthcare for all of their employees or face a $3,000 annual fine. This added to the cost of labor and tended to slow growth.
Obama was also concerned with big business taking advantage of consumers and with big business not spending money to make sure their manufacturing plants did not harm the environment. These concerns resulted in thousands of new regulations that added to the cost of doing business and slowed economic growth.
In fact, economic growth was never a priority of Obama. Curing the perceived social injustices was his top priority. Each action he took to alleviate those concerns added to the cost of business and slowed economic growth.
It is no wonder that Obama never had a single year where annual growth exceeded 2.6%.
President Trump came into office in 2017. He immediately reduced counterproductive regulations. That alone raised the growth to a 3% rate. Then he convinced Congress to cut taxes for every American. For the middle class, the tax cut meant more money to spend on goods and services they wanted rather than goods and services the government wanted them to purchase. This increased the multiplying effect that fiscal policy should have.
He cut taxes for the wealthy and for corporations. That created massive amounts of new capital which stimulates economic growth. The tax cut took effect in January of this year. By April, the economy was growing at more than a 4%. The growth rate will be even higher for the rest of this year and beyond.
Trump has set economic growth as his top priority. As a result, the high growth today and the high growth in the coming years are clearly a result of Trump’s economics policies.
Crediting Obama with the current strong economic growth is a bunch of poppycock.
Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.
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