President Barack Obama looks at reporters as he returns from a birthday visit at Camp David in 2012. (REUTERS/Jonathan Ernst)
The Wall Street Journal’s Greg Ip, reviewing the Trump administration’s first Council of Economic Advisers report, finds credible its claims that President Barack Obama’s policies, particularly in his second term, materially slowed economic growth, even though Ip acknowledges that the CEA’s assertions regarding magnitudes are likely exaggerated.
The CEA’s thesis is that a wave of tax and regulatory policies reduced both workers’ incentives to work and businesses’ incentives to invest, leading to slower economic growth than would otherwise have been achievable.
I am sympathetic to arguments of this type, having often observed that “business confidence is the cheapest form of stimulus.” And I would be the last to argue that every regulatory intervention of the late Obama years was salutary. I would also note that much of what the Obama administration proposed (for example, more infrastructure spending and responsible tax reform) would have triggered even greater economic growth but never came to pass, largely due to congressional roadblocks. There was certainly more that could have been done.
But at least three broad features of the economic landscape make the CEA’s view an unlikely explanation for disappointing economic growth.
First, the dominant reason for slow growth has been what economists label slow “total factor productivity” (TFP) growth. That is, the problem has not primarily been a shortage of capital and labor inputs into production, but rather slow growth in output, given inputs. After growing at about 1 ¾ percent per year between 1996 and 2004, the TFP growth rate has dropped by half since 2005.
While TFP has fallen off rapidly, there is no basis for supposing that levels of labor input or capital are less than one would expect given the magnitude of the …read more