It’s important to step back and assess what has happened. Over the past eight years, President Obama has accomplished his main objective—he has transformed America.
Unfortunately, the transformation hasn’t been positive. The country is as divided as it has ever been. There are a number of reasons for the increased divisiveness. One is the economy.
Productivity determines living standards. Historically, US productivity and living standards have increased by 1½% to 2% a year. These increases provided US workers with the highest living standards of any major country in the world.
With massive increases in both spending and regulations, the President and his Party have reduced increases in productivity and living standards. Over the past 4 years, productivity increased by ½% a year. In the past two years, the increase is has been only 0.3% a year.
Unfortunately, productivity tends to increase faster than average during an economic recovery. This suggests the longer-term productivity trend is currently flat to down. The US economy’s growth has been transformed from one of the world’s most dynamic to one of the world’s worst performing economies.
The transition should not have come as a surprise. My book, Rich Nation/Poor Nation describes how this type of transition has occurred every time our country has adopted so-called progressive policies.
With the election of Trump and GOP control of Congress, the first and most important transition will be a return to the rule of law. The Supreme Court majority will no longer rule based on “compassion for the underdog” and “life circumstances.”
While the idea of ruling in favor of the underdog may seem reasonable, it isn’t. Such rulings increase divisiveness and tear a nation apart. Judges are supposed to be impartial.
Imagine the reaction to a referee or umpire who decided to alter the rules to favor a weaker opponent. The end result would be anger, resentment and fights among both participants and their fans. The analogy is just as true for a country as for sports. Rulings based on biases and subjectivity promote lawlessness.
The lack of respect for the rule of law is one of the most destructive forces for any country. The Fraser Institute in Canada describes what has happened in the US:
The expanded use of regulation in the United States has resulted in sharp rating reductions for components such as independence of the judiciary, impartiality of the courts, and regulatory favoritism. To a large degree, the United States has experienced a significant move away from rule of law and toward a highly regulated, politicized, and heavily policed state.
Trump has presented a distinguished list of judges whose backgrounds are consistent with restoring the rule of law.
Trump also campaigned on eliminating many government departments and ending costly regulations. His main opposition in accomplishing these objectives will be professional politicians from both parties.
Trump’s supporters recognized this. The reason Republicans chose him over other potentially safer candidates was a belief Trump was someone strong enough to succeed and “drain the swamp” of special interests in Washington.
In terms of the immediate impact on the economy, little will change. It will take Trump many months to put together the specific programs necessary to accomplish his objectives.
Given his record of success in accomplishing objectives, I believe he will succeed. If he does, the US will not only restore its historical productivity growth, it’s likely to make up for lost time and grow even faster than history would suggest.
None of this will happen immediately. However, if Trump succeeds in reducing tax rates, cutting spending and repealing Obamacare, Dodd-Frank and costly climate-related regulations, we should begin to see some positive movement in the economy by late next year.
As a result, I anticipate the economy will continue to slog along at a growth rate of 2% or less through the first half of next year.
Finally, there is the issue of trade. Trump has talked about tearing up trade agreements and imposing tariffs. He will have to get more specific about just what he intends to accomplish in this area before it will be possible to evaluate his programs.
Given the high quality of his economic advisors, I do not expect there will be a trade war or any significant disruption to trade. However, trade remains a gray area as the main potential chink in Trump’s armor.