One of most striking contrasts between the Reagan and the Trump years will be the initial economic conditions that shape the early administrations of each of these presidencies and how the structure of the U.S. economy has evolved since the days of Ronald Reagan.
Donald Trump inherits an economy that is closer to the end of the expansion than the beginning. According to traditional business cycle chronology, the U.S. expansion began in June 2009 and is, at this point, seven and a half years old.
To be sure, many parts of the United States have yet to experience any economic recovery, which helped give rise to Trump’s victory in the first place. Nevertheless, the Trump economy is an aging expansion, already bumping up against labor and profit constraints as well as blow-back from tightening Fed policy.
President Reagan, by contrast, was elected in the midst of a serious recession during which Federal Reserve Chairman Paul Volcker worked to rein in a runaway inflation rate. The unemployment rate peaked at 10.8 percent in November 1982 — the second year of his administration and the very month that the economic recovery took hold.
The implementation of Reagan’s policies were almost perfectly timed to catch the tide of the economic recovery, and economic growth took off. Reagan’s tax cuts for individuals took effect at the beginning of 1982 and were phased in over the next two years — a five percent cut in 1982, 10 percent in 1983 and 10 percent in 1984.
The capital gains cut was effective June 9, 1981, to avoid postponement of sales of capital assets. Business provisions were also phased in to accelerate tax schedules for depreciable property placed in service January 1, 1981, or later.1
The economy exploded reaching a peak year-over-year growth rate of 9.4 percent in the second quarter of 1984 as interest rates came down and consumers and businesses responded to the tax cuts. Real economic growth averaged three to four percent annually in the years thereafter.
By contrast, the current expansion has already lasted almost eight years, and the capacity to lower unemployment and raise real economic growth without also raising inflation has been largely exploited. With a 4.6 percent unemployment rate, a Fed funds rate of 0.5 percent, 10-year Treasuries at about 2.5 percent, and inflation rising, most of the natural benefits of an economic expansion have been realized (Chart).
Moreover, by our gauge, which links stock prices and the unemployment rate, the stock market is close to a cyclical peak, which we estimate at about 2300 on the S&P 500.2 While Trump’s proposals may improve incentives, business investment and profitability, they are likely to create wage pressures and inflation and, in the process, lead to faster interest rate increases than financial markets expect as the Federal Reserve attempts to catch up.
1 More detail at: https://www.congress.gov/bill/97th-congress/house-bill/4242
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