Janet Yellen had a puzzle on her hands in 2017. The economy was growing at the same time that something was dragging down inflation. The Federal Reserveâ€™s statisticians dug into it and found â€œa large decline in telecommunication service prices,â€ which Ms. Yellen dismissed as an â€œidiosyncratic shift.â€ Actually, it was the tip of a supply-side iceberg headed toward the â€œsecular stagnationâ€ narrative of economic decline that had become so fashionable in Washington.
The Obama administration promulgated hundreds of new federal regulations that protected certain special interests from market competition. The beneficiaries included large banks, trial lawyers, big tech, major health-insurance companies, labor unions and foreign drug manufacturers. President Trump promised to undo all that, and in many cases succeeded, sometimes with the help of a Republican Congress. Ms. Yellenâ€™s statisticians were witnessing the macroeconomic indicators of a March 2017 deregulation. It was a key part of the lifting of the prohibition on internet services that offered lower speeds at lower cost, or in return for greater user data, under the labels â€œnet neutralityâ€ and â€œprotecting privacy.â€
In a series of changes, some of them a half-century overdue, Mr. Trump also helped remove government obstacles to innovation and competition in health care. Democrats will tell you that the first calendar-year drop in retail prescription drug prices in 46 years was mere coincidence, not the result of deregulation. Mr. Trumpâ€™s first redirection of the Food and Drug Administration proved to be a warm-up act for Operation Warp Speed, which shocked the â€œexpertsâ€ who predicted there was no way a Covid-19 vaccine could be approved in 2020.
Obama administration regulators waged a war on job creators, attacking them for their health insurance offerings, franchising practices, attorney-client relations and even timecard keeping. By pushing down wages and pushing up consumer prices, these employment and protectionist regulations were especially crushing to low-income households.
The Fed and the Obama economic team overpredicted growth almost every year from 2010-16. When growth failed to meet their rosy predictions, Mr. Obamaâ€™s advisers blamed the poor economic performance on America itself. The country, they said, had lost its innovative spirit and was aging into retirement. It was fundamentally incapable of anything more than tepid growth, insisted the secular stagnationists.
No one in Washington predicted that small business optimism would skyrocket to record levels when Mr. Trump was elected, that real wages would grow again (especially for blue-collar workers), that business formation would hit 20th-century highs, or that poverty and unemployment rates would quickly fall to record lows for Hispanics and African-Americans. And lately, the same crowd doubted that the U.S. economy could so swiftly climb out of the depths of the pandemic recession.
Mr. Obama said in 2012 that reducing Americaâ€™s corporate-tax rate would create â€œgood jobs with good wages for the middle-class folks.â€ The next year Lawrence Summers, chairman of Mr. Obamaâ€™s economic council, echoed that statement, calling it â€œas close to a free lunch as tax reformers will ever get.â€ Then, when they realized that Mr. Trump would actually do it, they changed their tune. When the Tax Cuts and Jobs Act became law in December 2017, the economy predictably took off, bringing millions into the labor force while real business investment surged past Congressional Budget Office projections. As important, the tax law helped ensure that capital investment was deployed more productively.
Mr. Trump also opted for protectionism in international trade, adopting many of the same plays that the Reagan administration did quietly, except now the â€œopponentâ€ was China rather than Japan and other East Asian tigers. There were real growth costs associated with the tariffsâ€”which are taxes on top of all other taxes and regulationsâ€”but they were time limited and their rates were not nearly high enough to offset the growth effects of deregulation and the 2017 tax law.
Although Mr. Trumpâ€™s economic policy was imperfect, it was preferable by a long shot to Mr. Obamaâ€™s, which punished work, hiring and success rather than rewarding them. By taking the opposite approach, the Trump economy sank secular stagnation like the Titanic.
Mr. Mulligan is a professor of economics at the University of Chicago and author of â€œYouâ€™re Hired! Untold Successes and Failures of a Populist President.â€ He served as chief economist of the White House Council of Economic Advisers, 2018-19.
Copyright Â©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8