By Udheesh Gaddipati
Discounting the pandemic, President Donald J. Trump’s four years in office have been accompanied by steady Y/Y economic growth. However, whether or not the current administration is responsible remains contentious. While proponents point to consistent GDP growth and full employment, opponents will argue that this growth was a mere continuum of Obama-era policies or even superficial – given rising inequality and stagnant real wages.
Regardless, this debate raises a legitimate concern: analyzing economic growth purely on a year to year basis fails to capture the strength of underlying market forces. Therefore, to better assess Trump’s impact on the economy, we will analyze prerequisite economic indicators – market competitiveness, economic sustainability, and individual well being – in a three part series covering the Trump Economy.
In this piece, we analyze Trump’s effect on the innovativeness and competitiveness of the American Economy.
So why is competition important? An economy that promotes fair competition encourages healthy levels of innovation and productivity growth. This results in more, better quality goods, cheaper prices, and new job creation. Additionally, improving industry competition by means of small business development results in the expansion and prosperity of the middle class; smaller firms introduce competition into labor markets and democratize capital contributing to real wealth and wage growth.
While the relationship between monopolization and entrepreneurship is dubious, since the 1970s the American economy has unequivocally become more concentrated and less competitive. Ian Hathaway – a Brookings Institute Economist – corroborates new business generation has declined since the 1970s and since 2008 the number of firms exiting the market has outpaced firms entering the market. Four airlines control 80% of domestic seats, 4 U.S grain and soy traders control 75% of the world market, 3 pharmacies control 99% of their market, and 1 internet retailer accounts for over 50% of all e-commerce.
This drop in small business development is problematic. A Harvard Business Review (HBR) cited study finds the presence of small businesses encourage innovation and productivity growth. Smaller, newer firms generate new products and processes at a faster rate than larger companies, and in some industries force larger counterparts to boost R&D spending. The U.S. Small Business Administration corroborates that while large firms generate 1.7 patents per hundred employees, smaller firms generate 26.5 patents per employee.
So did Trump-era policies provide sufficient solvency to America’s innovative crisis?
Taxes and Legislative Benefits:
The Trump administration has created several programs meant to stimulate small business growth; a 2017 White House report credits Trump with the Small Business Administration and Small Business Technology Transfer. Together, these programs provide a little under $300 million annually to innovative start-ups commercializing U.S. Federal R&D. However, these programs are strikingly similar to Obama-era policies and have not resulted in a significant change to overall business development.
More importantly, Trump’s Opportunity Zones – while seemingly spurred economic development in low income areas – disproportionately helped larger businesses access tax incentives. Opportunity zone development benefits rarely went to minority owned businesses and often gave the wealthy larger tax benefits to invest in the area. While this did spur development, over 97% of the capital spent in these zones went to high-end real estate while struggling small businesses continued to suffer.
Similarly, while President Trump credits recent economic growth to his tax cuts, independent fact-checkers have found his claim that “30 million small businesses will see a 40 percent cut in their marginal tax” to be false. The Bipartisan Senate Committee on Small Business and Entrepreneurship corroberates 86% of small businesses in America did not see lower rates as a result of Trump’s tax plan as a disproportionate amount of bigger businesses benefited from the tax plan.
While the NFIB Small Business Optimism Index did hit record highs under the administration, this seems to have been the natural consequence of an expansionary economy.
Deregulation and Little Antitrust Enforcement:
When Trump adopted a populist platform and actively condemned the Time Warner merger, many assumed he would take on big business. Makan Delrahim – Trump’s appointee to the DOJ’s Antitrust Division – has been quite vocal about bringing down big tech; however, he has yet to take significant antitrust action. Even more problematically, his “amicus programme”, where justice department lawyers are increasingly inserting themselves into antitrust litigation to advise judges how to rule has skewed America’s litigation in favor of big business. Whistleblowers from the DOJ report that not only has Delrahim encouraged them to side with entities like his former employer Qualcomm, but is using the DOJ’s power for politically-driven litigation on cases like marijuana industry mergers that possess little actionable threat to competition in their industry. Fearing no legal consequence, larger companies become more predatory hurting innovative small startups.
Further deregulation – like in the case of net neutrality – and administration backed op-eds titled “Competition is for Losers” warrant doubts on the Administration’s position against monopolization. Justin Talbot-Zorn, a senior adviser at the Center for Economic and Policy Research, concludes Trump’s approval of the Sprint/T-mobile merger and backtracked position on the AT&T/Time Warner prove his administration has “adopted Peter Thiel’s [endorsement] of [less] competition and concentrated power”.
Volatility and Start-up Seed Funding:
Technological innovation oftentimes helps boost productivity across multiple industries. Furthermore, HBR finds “venture capital backed scientific entrepreneurship has helped bridge this gap between corporate science and academia” hailing VC investments as a potential solution for America’s innovative slowdown. In fact, information and communication technologies (ICT) and life-science startups – with the transformative power to change business efficiency beyond just tech – received around 83% of all VC investments between 1995 and 2019.
Unfortunately, the last four years of the Trump Economy have been volatile. While the economy expanded, fumbling trade talks, chaotic tweets, and uncertain foreign policy positions (with regards to China, North Korea and Iran) sent speculation and consumer/business confidence swinging. “The issue with volatility,” Jeffrey Gordon – professor of business law at Columbia University – states is “it … affect[s the] willingness of VCs to invest in startups,” as venture capital firms and individual angel investors prioritize more mature investments over risky bets.
While the volume of VC seed investments climbed under the Obama administration, under the Trump Administration, seed deals have declined. It’s for these very reasons Goldman Economists have endorsed Biden arguing a change in administration could bring increased stability to the economy; something it desperately needs.
Limiting Human Capital:
A recent study by the Fiscal Policy Institute’s Immigration Research Center found that over 30% of all small businesses – with less than 100 employees – and around 20% of all small business workforce consisted of immigrants. Additionally, since 2001, over half of all startups valued at $1 billion or more were launched by immigrants. The Trump administration’s attack on legal immigration and closed border policies – block of the International Entrepreneur Rule, and cap minimization on legal immigration – may have negatively impacted entrepreneurship and innovation.
While America’s competitive decline may have started in the 1970s, President Trump failed to reverse this trend. The International Institute for Management Development – an independent agency tasked with assessing the competitiveness of developed economies – dropped the US from top 3 to number 10 on their list. Given a majority of American voters will base their 2020 decision on economic well-being, this administration’s failure to sustain healthy levels of competitive/innovative growth is something worth considering when assessing the efficacy of the Trump economy. □
- Cover image by Udheesh Gaddipati
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