It’s been 20 years since a US president handed his successor a low, still-falling unemployment rate. That president was Bill Clinton, and technically he handed that rate to himself, when he took the oath of office for a second time in January 1997.
You may recall what came next: the best four years for the middle class that any American who wasn’t alive in the 1960s can remember. Unemployment fell from just over 5 percent at the start of Clinton’s second term to below 4 percent in his final year in the White House. Median household incomes surged to what remains, at least for the moment, the highest level in US history after adjusting for inflation. Culturally, we remember the late ’90s for Seinfeld, impeachment, and Pets.com, but economically we remember them as the Clinton Boom.
The conditions are in place for Donald Trump to enjoy something similar. His predecessor, Barack Obama, inherited high and rising unemployment, which took years of slow and often frustrating recovery to chop down. Eight years later, the rate has finally slipped below 5 percent, though labor force participation remains low. Wages are growing across the board. Median incomes jumped faster in 2015 than at any time since the government started tracking them a half-century ago.
We remember the Clinton Boom fondly — the rising incomes part, not that pesky tech bubble — largely thanks to a phenomenon economists call “full employment.” In practical terms, it’s what happens when unemployment gets really low and employers have to start competing for workers, at every skill level. That competition bids up wages. It lifts everyone’s incomes.
As Jared Bernstein, a liberal economist who was a top adviser to Vice President Joe Biden, has written extensively, full employment is a surefire route to higher pay and faster productivity growth.
The good news for Trump is that the US economy looks awfully close to full employment now. Many economic forecasters don’t think the unemployment rate can fall too far below its current level, 4.7 percent. Federal Reserve officials, including Fed Chair Janet Yellen, seem convinced that the labor market is running close to full employment; that’s why they’ve resumed the process of raising interest rates from near-zero levels, even though inflation remains below the Fed’s target level of 2 percent.
All Trump needs to do is not get in the way of those trends.
The economy still isn’t growing very fast by historical standards, true. But if Trump wants to engineer the sort of wage boom that workers will remember for decades — and workers definitely still remember the Clinton Boom, particularly in the rural and industrial areas where Trump sealed his Electoral College victory — he doesn’t need to do much.
He doesn’t necessarily need the 4 percent growth he and his team are promising they can unleash for years to come. He probably doesn’t even need 3 percent. He just needs to stick with what’s working.
Make no mistake: Trump isn’t going to stand pat on economic policy. He’s going to pursue aggressive changes. He’ll slash corporate tax rates, in an effort to induce a surge in business investment, which remains low as a share of the economy by historical standards. He’ll keep pressuring manufacturers to add jobs in America. He’ll reorient American trade policy more dramatically than any president since Herbert Hoover.
How much change he can bring depends on his team and their coalition-building skills. How much juice he could add to the economy depends on whether his team is correct that high and complicated taxes, burdensome federal regulations, and misguided trade policies are holding companies back from spending and hiring more in the United States.
There are longer-term risks to his strategy, including ballooning the federal budget deficit and sowing the seeds, via deregulation, for another financial crisis. There’s also the chance his proposed tariffs will spark a global trade war that could push America, China, and nearly everyone else into recession.
But simple math suggests there’s a real chance Trump could boost growth, by a little or a lot, in a way that prolongs the late-Obama wage gains. If the Trump administration and Congress could agree on a tax reform package, for example, it seems almost certain that it will boost consumer demand in the economy, and very likely investment along with it.
If it boosts demand too much, sending inflation skyward, the Fed will almost certainly speed up its rate increases and attempt to keep the economy cruising at full employment. If Trump’s plans drain demand and don’t boost investment, and inflation and job creation start to slow, the Fed could stop its increases or even cut rates again.
This should help distressed workers across the country, including those who flocked to Trump’s candidacy, by fattening their paychecks. Ironically, though, a full-employment Trump Boom probably won’t help the president deliver on his biggest economic promise to those workers: reviving manufacturing employment.
For all the income gains of the late ’90s, Bill Clinton handed his actual successor, George W. Bush, an economy with fewer manufacturing jobs than it had when Clinton’s second term began. Economists don’t talk much about that side of the Clinton Boom. They may end up doing the same for Trump.