My Buddies, They Wrote Me A Letter

The Biden-Harris administration has made much of a letter signed by 16 Nobel prize-winning economists in late June "warning that the U.S. and world economy will suffer" if President Trump wins another term in the White House (Reuters). The letter says that the economic agenda of President Biden is "vastly superior" to that of President Trump. It goes on to say that Trump's plan to impose tariffs on China again would cause rampant inflation, leading to higher prices on imported goods. "We believe that a second Trump term would have a negative impact on the U.S.'s economic standing in the world, and a destabilizing effect on the U.S.'s domestic economy.," the letter stated.

President Biden referred to the letter during the disastrous debate performance that ultimately led to his ouster from his re-election campaign by the Democrat Party machine, and it was a topic he brought up during several of his subsequent rare public appearances. No doubt Vice-President Harris will make it a part of her campaign repertoire, assuming the Party machine allows her to remain the presumptive nominee.

I'm going to debunk that letter in this post. I'll start with facts and data - something those 16 Nobel laureates curiously left out of their letter - then I'll discredit the signatories to the letter itself, for they are not impartial, and they violated a couple of the cardinal rules of economics in writing the letter.

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Let's start by looking at Trump's economic agenda, then we'll contrast that with the agenda we could likely expect from a President Harris, which we can assume would be pretty close to that of President Biden, although Harris has yet to articulate an economic agenda of her own.

The beauty of the task set before me is that I have history on my side: Donald Trump has already been President for one term. And his economic agenda for the next term is really little different than it was for his first term: cut taxes and regulations, adopt an all-of-the-above energy policy to make America energy dominant, and yes, impose tariffs on those countries that engage in unfair trade practices with the U.S., especially those who impose tariffs on our goods and services.

Trump did all of that during his first term, so we have a rich data set by which to measure the results. We can see whether economic growth resulted, and we can see whether those policies ignited inflation, or hurt America's economic standing at home or abroad. I will present data to support my conclusions, unlike the Nobel laureates who penned the letter back in June.

One caveat is that Trump's economic record was interrupted by the economic shutdown that was implemented in response to covid, which caused an outsized, anomalous recession. However, it was very brief, and the recovery was rapid and robust. So we will look at President Trump's economic record both before and after the shutdown.

Taxes

In 2017, the Trump administration put forth the largest overhaul of the U.S. tax code in three decades. The legislation, known as the Tax Cuts and Jobs Act (TCJA), took effect on January 1, 2018. Its primary features were as follows:

• Cut the corporate tax rate from 35% - which in 2016 was third-highest in the world - to 21%.
• Cut the top individual tax rate from 39.6% to 37%; the 33% bracket to 32%; the 28% bracket to 24%; the 25% bracket to 22%; and the 15% bracket to 12%. The 35% and 10% brackets remained unchanged.
• Raised the standard deduction for single filers and married couples filing jointly significantly, eliminating the need for many itemized deductions.
• Suspended the personal exemption.
• Ended the individual mandate under the Affordable Care Act, which imposed penalties on those who did not purchase health insurance under the Act.
• Increased the Child Tax Credit and created a credit for non-child dependents, with income qualifications.
• Raised the estate tax exemption.
• Limited the mortgage interest deduction to $750,000 of debt vs. $1,000,000 previously.
• Suspended some miscellaneous itemized deductions.
• Capped the deduction for state and local taxes.

(Note that the Act was widely criticized for cutting the top bracket rate by more than the next two brackets. However, those in the top bracket tend to be business owners who create jobs, vs. the next two brackets who include more individuals who are merely wealthy earners, which was the rationale for the relative magnitude of the cuts for the top three brackets.)

To measure the effectiveness of the TCJA, we should look at three things:

1. Labor market metrics - as the name implies, the Act was intended to spur job growth. (We'll look at this only up to the covid shutdown; job recovery after the shutdown was largely a function of re-opening the economy.)
2. Economic growth, as measured by GDP growth.
3. Stock market performance - cutting corporate tax rates would benefit publicly-traded companies, and if their stock values increase, the wealth of Americans would also increase; not only wealthy investors but teachers, nurses, union members, and others whose retirement savings are invested in mutual funds, exchange-traded funds, and pension funds, the largest holders of U.S. equities in the world.

Under the Obama-Biden administration, nonfarm payroll growth averaged 121,000 jobs per month. However, during the early months of the administration, payrolls were still declining sharply due to the Great Recession of 2008-09, so let's just look at President Obama's second term. During that time, payroll growth averaged 216,000 per month.

In 2017, prior to the effective date of the TCJA, payroll growth averaged 171,000 per month. From the effective date of the Act to the covid shutdown, payroll growth averaged 184,000 per month.

Thus it's inconclusive whether the TCJA resulted in greater job creation. However, there are a lot more variables involved in job creation than just taxes. Also, payroll growth was gaining momentum in late 2019 and early 2020, averaging more than 200,000 per month, so assuming there would be some lag between the effects of lower taxes and job creation, it could be argued that the TCJA had some effect. Note also that job recovery and growth from the Great Recession had matured, and we were approaching full employment. At that point in an economic cycle, job growth always slows. So we need to also look at the unemployment rate.

The jobless rate under the Obama-Biden administration was similarly skewed by the early months, when unemployment was still very high due to the Great Recession, so again let's just look at the second term. During that time, the unemployment rate averaged 5.8%.

In 2017, prior to the TCJA, it averaged 4.3%. (To be fair to Obama, it had been declining throughout his second term - and there's that evidence that we were reaching or had reached full employment, which Obama's Fed Chair, Janet Yellen, had defined as 5%. This explains why job growth was slowing.) 

From the effective date of the TCJA until the month prior to the covid shutdown, the jobless rate averaged 3.8%, reaching 3.5% in February 2020 - which at the time was the lowest rate since 1969. Also, unemployment among minorities was at record-low levels. Jobless claims were also at levels not seen since the 1960s.

As for GDP growth, during the second Obama-Biden term, it averaged 2.48%. For 2017, it was 2.96%. From the beginning of 2018 up to the covid shutdown, it averaged 2.63%. So again, an inconclusive result; but again, there are more moving parts at play than just taxes. (And, I should note, some of the rapid and strong recovery from the covid shutdown, both in employment and in output, undoubtedly owes to the favorable tax environment.)

Finally, let's look at stock market performance, specifically, the S&P 500 Index. It's hard to place much weight on market performance during President Obama's term, because the market was still being supported by the Fed's Quantitative Easing program through 2014, halfway through his second term. However, the average annual gain in the S&P during that term was a little under 13%.

In 2017, it was 18.6%. From the TCJA effective date until just before the covid shutdown, it averaged 9.75% per year. Again, this is inconclusive, and again, there is much more to stock market performance than taxes (in fact, taxes play a much smaller role than other factors, including regulations). However, it's noteworthy that in early 2020, just before the covid shutdown, the S&P 500 hit an all-time record. Also, despite a 19% decline in March 2020, when the economy was shut down, the S&P eclipsed that record in August, just five months after the shutdown, and had reached a new record by the time President Trump left office. The index returned 16.3% overall for 2020, in spite of the shutdown, and arguably some of that was the result of a favorable tax environment.

Perhaps the best measure of the effects of the TCJA is to answer the question Ronald Reagan posed in his campaign for President in 1980: "Are you better off today than you were four years ago?" In economic terms, very few Americans could honestly answer that question "no" in October 2020. Virtually all of us were paying less in taxes. Our investment portfolios were doing better. There were more jobs, and unemployment was lower, at least until covid hit. Even after covid, taxes were lower and investment returns were higher, and output growth had recovered to 99% of its pre-covid level.

It's harder to measure the effect of cutting regulations, so I'm not going to address that here, other than discussing energy policy below. Suffice it to say that cutting regulations benefits businesses, which is good for job growth, stock market performance (again, benefitting both large investors and small retirement savers), and economic growth and competitiveness. One example of cutting regulatory red tape under the Trump administration was Operation Warp Speed, which got the covid vaccine developed, approved, to market, and ready for global distribution in well under a year. This enabled the Biden administration to be ready to respond to covid (although they initially fumbled the distribution plan), and it's responsible for much of the economic growth of 2021, as it allowed more sectors of the economy to re-open. After 2021, the economy began to contract.

Energy

There are also a lot of moving parts to energy prices. However, prior to the Trump presidency, America was heavily dependent on foreign oil. We saw the disastrous effects of that during the Carter years. And while the Obama-Biden and, to an even greater extent, the Biden-Harris administrations have attempted to push the nation toward "green" energy, there are a multitude of problems with attempting to make those sources our primary sources of energy today.

First, the world still runs on oil. Attempting to change that overnight, rather than gradually, is a fool's errand. Second, the infrastructure does not exist today for green energy to be a primary energy source. We don't have the electrical grid to support widespread ownership and operation of EVs. There aren't nearly enough charging stations, and the Biden-Harris administration's $7 billion investment in building 500,000 charging stations within eight years has only resulted in 12 new stations in two years. Third, EV technology is expensive, and it can't scale fast enough to become affordable. Fourth, EV technology isn't sufficient for most Americans' needs. EVs' limited range won't accommodate most Americans' travel preferences, and there are risks in the event of evacuating from events like hurricanes, operating them in severe winter weather, etc. And finally, green energy isn't that green. The fossil fuels required to produce an EV battery or a wind turbine are greater than the carbon footprint savings, and disposing of them creates more environmental harm than the benefits they provide.

President Trump immediately adopted an all-of-the-above energy policy upon taking office in 2017. I'm not going to look at energy prices post-covid, because a lot of the downward pressure on prices after the pandemic resulted from a severe decline in demand, as air and cruise travel were decimated and there were a lot fewer Americans on the road. (I know - I went on a driving vacation in June 2020, and it was pretty much just us and the tractor-trailers.)

West Texas crude oil prices only fell by about $1.60/barrel from February 2017 to February 2020, but part of that was because we were drilling a lot more oil and selling it abroad. Gas prices from the time President Trump took office until the covid shutdown averaged $2.58/gallon, vs. more than $3/gallon for the seven years prior (discounting the first year of the Obama-Biden term due to the dampened demand from the Great Recession).

(I'm getting ahead of myself, but gas prices under the Biden-Harris administration have averaged about $3.50/gallon.)

From 2017 to 2020, the U.S. was the #1 oil producing country in the world, higher than Saudi Arabia or Russia. We were still the top producer of oil in 2023, but our production had fallen 32% from 2020, and Russia had surpassed Saudi Arabia. We were energy independent when President Trump left office, and moving toward energy dominance. Our Strategic Petroleum Reserve was 638M barrels at the end of 2020. Again, I'm getting ahead of myself, but today, it's less than 367M barrels, down more than 42%. We are no longer energy independent.

Tariffs

This is the hot button, the item that the Nobel laureates claim will cause inflation to spike. Let's look at the record, because Trump imposed tariffs in his first term.

In January 2018, President Trump imposed tariffs on solar panels and washing machines. The tariffs were steep - 30-50%. In March, he imposed tariffs on steel and aluminum imports from most countries, ranging from 10-25%. The administration also increased tariffs on Chinese imports.

Some trade partners implemented retaliatory tariffs, including Canada, India, and China. The Trump administration responded by using the Commodity Credit Corporation to provide aid to U.S. farmers. The administration threatened additional tariffs on Mexican imports to stem the tide of illegal immigrants, but those tariffs were averted through negotiations. (It worked, as Mexico cooperated in stopping immigrants at its border through the Remain in Mexico agreement, and illegal immigration fell by 50% as a result. We know what's happened since - and what the results have been. An estimated 50% of job growth today is due to illegal immigration, at the expense of U.S. workers.)

In December 2019, the U.S. and China suspended a portion of their tariffs, then a month later signed a trade agreement that resulted in the tariffs being further reduced in February and March, 2020.

So, did the tariffs cause inflation from 2018 to 2020? Again, we'll exclude the post-covid time period, since reduced demand and opportunity to spend during and after the shutdown dampened prices.

The month after Trump took office, CPI year-over-year was 2.8%. In February 2020, just before the covid shutdown and when the tariffs had largely been suspended and/or reduced, CPI was 2.3%. The highest annual rate of inflation during the time the tariffs were in place was 2.9%, one-tenth of a percentage point higher than when Trump took office. The lowest rate was 1.5%, in January and February 2019, when the trade war was at its peak - roughly half the rate of inflation when Trump took office, and nearly a percentage point lower than when the tariffs were put in place.

Clearly, the tariffs did not cause an inflationary spike. Further, GDP grew, unemployment fell, the stock market rose, and illegal immigration declined.

Conclusion

It's inconclusive whether Trump's tax policy created jobs, increased output growth, or increased stock market returns, but there are many variables involved in those measures of economic performance. We do know that jobs grew, unemployment fell, GDP rose, and the stock market reached record levels during his term, in spite of the covid shutdown. We also know that Americans' after-tax incomes were higher.

It's clear that his energy policy reduced gas prices and made America energy independent. And it's unequivocally clear that his tariffs did not result in higher inflation. Trump's policies certainly didn't have an adverse impact on America's economic standing in the world, nor did they destabilize the domestic economy (unless you want to count the decision to shut down the economy in response to covid, but we can largely thank Fauci and Birx for that, and besides, his policies brought the economy back to near-full recovery before he left office, as I outlined in my most recent post).

Now, let's turn our attention to what we might expect from a Harris economic agenda. As noted, we really know nothing at this point about what her plans would be, assuming the party machine even allows her to remain the presumptive nominee. Only the polling results will tell.

We do know that she has been in lockstep, to a degree, with President Biden's policies over the last three and a half years. We also know from past statements that she is even more opposed to fracking and more committed to green energy than her boss has been. So about the only thing we can conclude is that we'd be looking at four more years of Bidenomics, but possibly with a booster shot.

So what have we experienced as a result of Bidenomics in terms of the measures above? Well, we've had job growth, but as I've written extensively, that's still just job recovery from the covid shutdown, because we're still about four million jobs short of where we'd be in terms of normal growth had the economy not been shut down in the first place. And as noted, it's been aided and abetted by illegal immigration.

We do know with certainty that taxes would go up, because most of the provisions of the TCJA are scheduled to expire at the end of 2025, including the cuts to the corporate tax rate and the individual brackets, as well as the increase in the standard deduction and the elimination of the personal exemption. So, unless Congress and the new President take action to make those cuts permanent next year, the 2026 tax brackets will revert to their pre-2018 levels.

That means a tax increase for nearly every American, and a return to a corporate tax rate that is among the highest in the world, which would almost certainly result in a sharp correction in the stock market, hurting small and large investors alike. If you're a teacher or a nurse or a truck driver, your retirement savings will take a hit - and so will your take-home pay.

President Trump has vowed to fight to make those tax cuts permanent. In fact, he wants to cut the corporate tax rate further, to as low as 15%, and to eliminate income taxes on tips.

(As an aside, there is a meme floating around social media claiming that this plan is intended to allow lawyers and hedge fund managers to get their large bonuses re-classified as tips so that they're not taxable. America, how ignorant are you? This would be a blatant violation of wage and hour laws. It simply can't happen. Wise up.)

On the other hand, Congressional Democrats are determined to allow the TCJA to expire as planned, and President Biden has said he would veto any legislative effort to make it permanent. We can only assume a President Harris would do the same.

Under President Biden, GDP slipped into negative territory in the first two quarters of 2022, and the 2024 Q1 reading was below 1.5%. The advance release for 2024 Q2 was better, at 2.8%, but is expected to be the highest level of the year (and note that the advance release for Q1 was revised downward in the later releases). Clearly, we're tilting toward recession. Maybe the Powell Fed can engineer a soft landing in the event of a Harris victory, but otherwise, a recession appears inevitable. Trump's agenda is pro-growth, pro-business, and pro-jobs, providing a better chance of a return to growth without relying on monetary accommodation that could result in another bubble.

I already noted what's happened to gas prices under President Biden, and that would be likely to continue with Harris' staunch opposition to fracking and commitment to green energy. We'd likely see a doubling-down of the commitment to phase out gas vehicles and force Americans into EVs. A recent study of EV owners found that nearly half of U.S. EV owners plan to switch back to gas vehicles with their next auto purchase - assuming they can. Ford missed its Q2 earnings estimate by a significant margin due to massive losses on EVs, so corporate America will suffer if the EV-only push continues. China will prosper, and Americans will continue to drive their used gas-powered cars.

We've also seen a huge spike in inflation under the Biden-Harris administration: prices are up about 20% since they took office, even though the rate of inflation is down from the peak of 9% year-over-year in mid-2022. What's worse is that they don't seem to understand what inflation is; as the rate of inflation has fallen, they insist that prices are down. They're not. They continue to rise, but at a lower rate than two years ago (but still at a higher rate than under the previous administration, tariffs and all).

Now that we've thoroughly debunked the letter penned by these 16 Nobel laureates, I'm going to discredit them.

First, let's address the Nobel prize itself. Several noted economists - Franco Modigliani, Merton Miller, Harry Markowitz, William Sharpe, and Eugene Fama - were awarded the Nobel Prize for their work in various market pricing theories. I've studied this work extensively, and much of it is solid. However, a good portion of their work - especially that of Fama - is based on the Efficient Market Hypothesis (EMH), the notion that markets are efficient. I won't go into EMH in detail, but suffice it to say that it's wrong.

Markets aren't efficient. I knew it intuitively when I studied Fama et al during my Chartered Financial Analyst (CFA) studies, and based on my own research. But smarter people than I have debunked Fama's work, and have themselves received the Nobel prize for doing so (Robert Shiller and Richard Thaler). These aren't the only instances of Nobel prizes having been awarded for work that was subsequently proven wrong. Science and literature provide other examples. But Fama didn't have to surrender his Nobel prize.

And let's not forget that the Nobel Peace Prize was awarded to a freshman President whose only contribution to global peace at the time was a world tour during which he apologized to foreign leaders for America being ... America.

But as far as these 16 Nobel laureates who wrote the letter in June regarding Trump's agenda vs. Biden's, they broke two cardinal rules of economics. First, they didn't use data to support their conclusions, as I've attempted to do above. They easily could have, and probably more eloquently than I, though they'd have had to have reached a quite different conclusion than they did, because the data contradicts their assertion.

Second, and more important, they did not adhere to the requirement of political agnosticism in forming an economic opinion or forecast. You see, eight of those 16 economists have made financial contributions to the Democrat Party, and four of them contributed directly to President Biden's campaign. (Not one of them has contributed to the Republican Party, or to President Trump.)

In other words, they're biased.

Sure, I have my political opinions, and I vote, as I assume every economist does. I did note above where the data was inconclusive. And I've criticized Trump for caving to Fauci and Birx and allowing the economy to be shut down. But I go where the data leads me. And I've never donated money to a political party or candidate.

This was a curated, hand-selected list of economists, recruited by the Biden-Harris campaign to pen this letter, without a shred of credible evidence or data to support it. It's no different than the curated lists of pre-screened reporters who are given pre-selected questions to ask in advance of the rare press appearances President Biden has made over the past four years.

So there isn't an ounce of credibility in this letter. We need only to look at the records of these two Presidents over the single term each of them served, and extrapolate it over the next four years (assuming the proxy of one of them continues his policies).

One would bring economic growth, lower unemployment across a broad socio-economic spectrum, lower taxes, low inflation, low energy costs, energy independence and/or dominance, and increased overall financial and retirement security.

One would bring economic stagnation (because output growth is slowing), increasing unemployment (because job growth is slowing and unemployment and jobless claims are rising), higher taxes beginning at least in 2026, higher energy costs and continued energy dependence (including on our enemies), and reduced prosperity.

The choice is yours.