In his speech at the “World Economic Forum” in Davos in January, Donald Trump praised his economic policy as a model for the whole world. In fact, since Trump took office in 2017, the United States has had the highest growth rates of all G7 countries. Nevertheless, his economic policy is not a blueprint for other industrial nations.
Strong economic growth since Trump took office
According to the International Monetary Fund (IMF), the United States has had the highest growth rates in real gross domestic product (GDP) of the world’s seven major industrialized countries, the G7 countries, since 2018. The average annual growth rate between 2017 and 2020, for example, is one percentage point higher in the United States than in Germany (see Fig. 1).
Decline in unemployment began long before Trump
The strong economic growth in the United States has also been accompanied by a decline in unemployment. However, the reduction was larger between 2011 and 2016 than between 2016 and 2020 (see Figure 2). In the first phase, the decline averaged around 0.6 percentage points per year. After that, the annual decline averaged only .033.
Low investment level as a brake on future growth
A key precondition for future economic growth is investment. Investment increases the production capacity of the economy. The share of overall investment in the United States economy currently accounts for only around 21 percent of GDP. This is less than in Japan, France, Canada, and Germany (see Figure 3). In the longer term, low investment means that low GDP growth rates can be expected.
Rising public debt despite economic growth
In advanced economies, high economic growth usually implies relatively high public revenues and low social expenditure. This suggests a government surplus and a decline in public debt.
In fact, however, the level of public debt – measured by the ratio of public debt to GDP – has increased in the United States since Donald Trump took office. For 2020, the IMF expects government debt in the US to amount to around 108 percent of GDP (see Figure 4).
On the other hand, in Germany, where economic growth has been lower than in the United States in recent years, there has been a significant decline in the government debt ratio.
Long-running current account deficits increase United States external debt
The United States is characterized by a relatively high propensity to consume – and a low propensity to save. In order to meet the high internal demand for goods and services, the United States has had to import more than it exports to the rest of the world. The result is a current account deficit (see Figure 5).
Since the United States is spending more on foreign trade than it earns. It has to finance this resulting deficit with foreign loans. Given the absolute size – in 2019, the United States had a current account deficit of more than USD 500 billion by far the highest in the world– U.S. external debt is rising accordingly.
Key elements of the US economic policy under Trump
A central element of American economic policy under Donald Trump is a significant reduction in taxes for private households and companies through the “Tax Cuts and Jobs Act” . Lower taxes increase the disposable income of consumers and thus increase consumer demand. Companies adapt to this higher demand — production and employment increase. At the same time, government spending was massively increased by the “Bipartisan Budget Act of 2018” .
The combination of tax cuts with simultaneous increases in government spending explains why public debt in the United States is rising despite economic growth and lower unemployment. It also explains why the current account deficit, expressed in USD, is rising notwithstanding the fact that the US is trying to curb its imports with punitive tariffs: The demand for goods and services is at such a high level that the production capacity of the American economy is not sufficient to meet this demand.
This economic policy is not sustainable. Sooner or later, rising public debt will make it necessary either to raise taxes or to cut public spending. The growth impulse triggered by domestic demand will come to a stop and weaken the economic dynamic.
Lower public revenues also reduce the government’s scope for redistribution. Income inequality, which in the United States has already reached a high level by international standards, could further increase.
Finally, the protectionist policies of the Trump government are damaging the American economy. Punitive tariffs on imports, especially from China, cause a rise in prices of products affected by these tariffs. Low-income consumers who are dependent on cheap products suffer most from this. In addition, the costs of production rise in companies that use imported inputs. This reduces the international competitiveness of these companies.
The undeniably high growth of the US economy since 2017 is not a sustainable economic development. It is largely a cyclical flash-in-the-pan financed by public debt, which simultaneously operates with considerable protectionist measures. This is not a model for the whole world.