The US not as "great" as President Trump claims?

Economic opinion

US President Trump's new election slogan, "Keep America great", implies that everything is marvellous in the US and that he will keep it that way if he is re-elected in next year’s presidential election. Yet, it's not all roses in the country. The US is suffering from a number of persistent structural weaknesses despite its long period of macroeconomic growth, especially with regard to socio-economic factors such as income inequality and poverty, health care and education. In the longer term, this poor socio-economic performance is also a threat to macroeconomic growth. The structural problems require solutions with a long-term focus. "Make America great for everyone" might have been a better campaign slogan for President Trump...

 

"Keep America great" is the slogan with which current US President Donald Trump hopes to win the election that will take place in a year's time. Four years ago, that slogan was "Make America great again". So, the president is claiming that everything is marvellous in the US now and that he is the one who will keep it that way if re-elected. Although President Trump undoubtedly thinks he’s done a great job in the White House, are things really so great for the majority of Americans?

Macroeconomic excellence

On a macroeconomic level, the US economy is still doing well. After the financial crisis, 2009 saw the start of the longest ever economic growth period. Real GDP growth, with the exception of 2016, remained consistently above potential growth. In addition, last year the tax reform and fiscal stimulus measures introduced by the Trump government gave an additional boost. Real GDP per capita also grew strongly, albeit at a slightly slower pace than real GDP. According to the Trump administration, the end of this long growth period is not yet in sight. The budget proposal published by Trump earlier this year assumes an average annual GDP growth rate of 3% between 2018 and 2029. That scenario seems unlikely to us. After all, the US economy is in a late-cyclical phase. In the context of the trade war and a deteriorated international economic environment, we rather expect a slowdown in average annual growth in the coming years (see also: KBC Economic Perspectives October 2019). International organisations such as the OECD and the IMF share this view.

Socio-economic disappointments

Although macro-economic growth has remained strong over the past decade, this picture hides poor socio-economic performances. The US has long faced a number of structural challenges, which have certainly not diminished under President Trump's regime. Among other things, health care remains a weakness in the US. Despite the fact that per capita spending on health care in the United States is relatively high, life expectancy there is significantly lower than in comparable developed countries. According to OECD figures, life expectancy at birth is 78.6 years in the US, compared to, for example, 81.3 years in the UK and as high as 84.2 years in Japan. Health care expenditure is high, but the results are hence not commensurate. The main reason for the high expenditure1 is above-average prices for medicines and medical services provided by doctors. In addition, administrative costs in the health sector are very high. A positive development is the halving of the percentage of the population without health insurance during the past decade. This was mainly due to the Affordable Care Act introduced by Trump's predecessor, President Obama, in 2010. However, President Trump has already expressed his dissatisfaction with this legislation on a number of occasions. The positive effects are therefore certainly not due to him.

Despite economic expansion and the associated favourable labour market conditions, the level of poverty in the US remains high. Defined as the percentage of the population with an income after tax and transfers below 50% of the median income, the poverty rate is 17.8% (figures for 2016, OECD). By way of comparison: The poverty rate in the US is the highest among the OECD countries and about 12.4 percentage points higher than in Denmark and Iceland, which are the lowest in the ranking. The US is also not doing well in terms of income equality. The Gini coefficient is among the highest of the OECD countries. The US ratio of the upper bound of the ninth income decile - i.e. 10% of the population with the highest disposable income - to that of the upper bound of the first decile (P90/P10 ratio) is also among the top three OECD countries.

In addition, there is still room for improvement regarding education. Total spending on education is very high in the US compared to the rest of the world. In fact, spending on higher education as a percentage of GDP is the highest among all OECD countries. However, this does not translate into relatively better educational outcomes compared to other OECD countries. In the subcategories of the PISA survey2 (2015), American students score well below the OECD average for mathematics and only slightly above the OECD average for reading and science. 46.4% of the population aged 25-64 have a higher education qualification in the US. This is significantly higher than the OECD average (37.7%), but also significantly lower than Canada's 56.7% share at the top of the OECD ranking.

Macroeconomic consequences

In the longer term, the poor socio-economic outcomes also pose a threat to macro-economic growth. Some people cannot afford medical treatment because of the high healthcare costs, which may reduce their productivity. In addition, low income equality has a negative impact on household consumption. Poverty also leads to fewer opportunities and resources and often to lower employment rates. Besides, the exorbitantly high price for higher education in the US has led to a huge student debt burden which causes younger generations to curb spending and put off things such as buying a house.

Not everyone has benefited from the good macroeconomic performance of the past decade in equal measure. The structural socio-economic problems are difficult to fully solve during a presidential term of four years. After all, they require solutions with a long-term focus. In recent years, however, President Trump has also failed to bring about a significant change. For example, life expectancy continues to fall, and the Gini coefficient has increased in recent years. Several studies have also shown that the tax reform introduced in 2017 was particularly beneficial for the higher income classes, thereby even fuelling inequality. On a socio-economic level, the US is, hence, certainly not working on a fantastic course. "Make America great for everyone" might have been a better campaign slogan for President Trump.
 

Footnotes

1 Source: Papanicolas I., Woskie L. and Jha A. (2018), “Health Care Spending in the United States and Other High-Income Countries”, Journal of the American Medical Association (March 13,2018).

2 The PISA-survey (Programme for International Student Assessment) is a three-yearly OECD survey that assesses the performance of 15-year-old school pupils in terms of mathematics, reading skills and sciences.

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