Recessions have waylaid most U.S. presidents. But President Trump seems to think he’ll be an exception.
Every president since World War II has had to contend with a recession, except for two: Lyndon Johnson, who faced plenty of other problems, and Bill Clinton, who had the good fortune to preside during the birth of the Internet age. But President Trump sees no recession on the horizon, even though we’re now most likely in the late stages of an economic expansion that’s nearly 9 years old.
The Trump administration projects annual average GDP growth of 2.9% per year through 2027. That exuberant assumption underpins the Treasury Department’s recent claim that the tax cuts Congress is poised to pass soon will generate $408 billion in new economic revenue. In theory, Treasury says, tax cuts will stimulate the economy, producing more hiring, bigger profits and a bigger tax haul from all of it.
Even the Treasury’s rosy outlook acknowledges that overall, the tax cuts would add somewhere between $1 trillion and $1.5 trillion to the national debt over the next decade. But it could be way worse than that if a recession arrives and the economy contracts. And historical evidence strongly suggests that’s likely to happen.
Since 1945 there have been 11 recessions, which means they occur every 7 years or so, on average. If we make it to 2027 without a recession, that will be a record 18-year economic expansion, nearly twice the length of the longest post-war boom so far, which ran from March 1991 through March 2001.
If that does happen, it still probably won’t entail 2.9% annual growth. Moody’s Analytics forecasts growth rates of just 2.3% this year, 2.8% in 2018 and 2.2% in 2019. That’s an average of 2.4% per year, assuming nothing goes wrong. Trump’s cheerful economists think growth will average 2.7% through 2019, and 3% thereafter. Those extra decimal points in the Trump forecast help justify a giant tax cut now, because even a small improvement in growth would yield a meaningful amount of new tax revenue.
If there is a recession during the next decade, however, there’s essentially no chance growth will average 3%, or anywhere near it. That’s because downturns take a sharp bite out of average growth rates. From 1951 to 2014, for instance, GDP grew at an annual rate of just 2.1%, accounting for inflation. That includes several years when real GDP boomed, growing by more than 5% per year. But growth was negative during most recessions, bringing the average down sharply.
From 2000 to 2010, real GDP growth averaged 1.9%. But if you exclude three years with low or negative GDP growth caused by recessions – 2001, 2008 and 2009 – then growth averaged 2.8%. It’s so much better to leave the recessions out!
The GOP tax cuts have drawn sharp criticism from some economists who argue that cutting taxes—and federal revenue—now will simply require future tax hikes to recoup the lost revenue. “There is good reason to doubt that deficit-financed tax cuts will boost economic growth much, if at all,” William Gale of the Tax Policy Center wrote recently. “There have been huge changes in taxes throughout US history with virtually no observable shift in growth rates.”
If Trump turns out to be a one-term president, he may leave office before the next recession hits and be able to claim (accurately or not) that his tax cuts helped the economy. If Trump is a two-termer, it’s much more likely he’ll have to explain the budget hole typically comes with a recession, like most of his predecessors. And find a plug to fill that hole.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman