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Trump’s secret weapon in 2020

President Donald Trump pumps his fist as he

President Donald Trump pumps his fist as he leaves after speaking at a campaign rally. Credit: AP / Jim Mone

Republicans scrambled to push through tax reform last year in part because they thought it would boost their chances in this year’s midterm elections. They were wrong about that - but last year’s tax reform may help President Donald Trump’s chances in 2020.

Some background: In the run-up to the 2016 election, the economy was steadily weakening. In the first quarter of 2015, year-over-year growth in GDP stood at 3.8 percent. That rate had declined to 1.3 percent by the second quarter of 2016. And as the economy slowed, so did the growth in employee compensation, which was growing at 3.8 percent in the second quarter of 2015 but had fallen to just over half a percentage point a year later.

Since the election, however, the economy and employee compensation have both recovered strongly. At least two factors are contributing to economic growth: First, the tax cuts have boosted overall performance. Second, an increase in oil prices has led to a boom in investment and oil-related manufacturing.

Explaining the growth in wages is more complicated. Before accounting for cost-of-living changes, compensation is growing just as fast as it was before the 2015 slowdown. But those gains have been eroded by a rise in inflation driven by the same increase in oil prices responsible for the overall economic boom. After adjusting for inflation, first-quarter compensation growth in 2018 was an anemic 0.7 percent.

It is surely ironic that a tax bill Republicans rushed through Congress last year comes too late to help them at the polls this year. Nevertheless, tax reform has provided a needed boost to the economy, and the oil and gas boom has increased the demand for manufacturing and construction workers. It’s just that rising oil prices mean that majority of Americans have seen little improvement in their daily finances, which is what matters most when they go to the polls next month.

Look more long-term, however, and the outlook for workers is more positive. Industry investment in infrastructure is projected to allow for strong increases in oil production growth in late 2019. Those increases will bring not only more jobs but also lower prices.

Which brings us to 2020. Today’s cost-of-living increases in inflation will probably reverse themselves in 2020, giving an extra boost to most working families. That boost could redound to Trump’s benefit as he seeks re-election.

Karl W. Smith is a senior fellow at the Niskanen Center and founder of the blog Modeled Behavior.