Back in 2017, concerned over the sclerotic growth of the U.S. economy, PRI published a series of studies titled Beyond the New Normal by economist and PRI senior fellow Wayne Winegarden. Up until that point, annual real GDP growth averaged just 1.9 percent since 2001. Many economists, resigned to our nation’s economic fate, called this level of GDP growth the “New Normal.”
The PRI series looked at four major turning points in recent history when major shifts occurred in economic policy (fiscal, monetary, regulatory and trade). In the 1960s, 80s, and 90s, when policies were enacted to encourage growth incentives – production, efficiency, and market-based prices that accurately reflected supply and demand – those periods saw strong economic growth. In contrast, the policies in place during the 1970s and from 2001 throughout the Obama era — policies that distorted prices, decreased incentives to take risks, and increased government spending – discouraged growth.
In 2018, just a few months after the entire series was published, GDP shot up to more than 3 percent for a couple of quarters. Humph. The U.S. economy was already there – beyond the new normal. I thought we would have to shelve the study.
I had too much faith.
Despite deregulation, corporate tax cuts, and low unemployment, GDP was just 2.3 percent in 2019. What happened? I asked Wayne Winegarden to give a grade for each of the key economic policies he discusses in his study:
- Fiscal Policy: F
The deficit is up nearly 50 percent during the Trump Administration — a whopping $984 billion at the end of 2019, while the national debt now stands at $23.3 trillion compared to $20.2 trillion at the end of the Obama Administration. No spending restraint by Congress or the Administration has even been attempted. - Monetary Policy: D
Rather than follow a rules-based, data-dependent, monetary policy, this Fed continues to distort how investments are allocated due to its over-inflated balance sheet and the focus on economic uncertainties such as the Administration’s trade policy to guide its actions. Even more worrisome, last year’s rate cuts have reduced the Fed’s ability to counteract future economic downturns or black swan events such as the coronavirus’ impact on global GDP. - Regulation: B
The Trump Administration has cut 8 regulations for every new rule, far exceeding the promise to cut two regulations for every new one. According to the White House, President Trump’s deregulatory efforts have already slashed regulatory costs by nearly $50 billion, with savings reaching $220 billion once major actions are fully implemented. This is good news, but we couldn’t give him an A because of other regulations he’s proposed, such as an international price index for pharmaceuticals. - Trade: F
Relying on protectionism and high tariffs to force China to open its markets, respect intellectual property, and stop its cyber hacking has come at a cost to the U.S. and disrupted supply chains worldwide. Had the U.S. not embarked on a trade war, GDP and the stock market could well be even higher.
There you have it. It’s no wonder we’re back to 2 percent GDP.
But cheer up, things could go from wimpy to worse. The Tax Foundation recently did an analysis of the payroll tax policy changes proposed by the five major democratic presidential candidates, and how those policies would impact GDP. Higher payroll tax rates and/or increasing the payroll tax base could reduce GDP by -0.28 percent (Biden) to -1.17 percent (Sanders). And that would be just the impact of their payroll tax schemes.
One small consolation — we still have a few boxes of Beyond the New Normal studies we can send out if you’d like to learn more.
Rowena Itchon is senior vice president of the Pacific Research Institute.
