Trump\'s Legacy of Economic Recovery
Sometime before election day, US President Donald Trump announced that the country\'s economy had seen substantial improvement in the third quarter.
Sometime before election day, US President Donald Trump announced that the country\'s economy had seen substantial improvement in the third quarter.The economy had improved 33.1 percent compared to the second quarter. It was a substantial change because from the first quarter to the second quarter, the US economy had experienced a contraction or minus 31.4 percent as a result of the Covid-19 pandemic.
Improvement signal
Of course, Trump\'s claim of achievement was not easy to accept by his critics. According to his critics, the data presented by Trump was one-sided information. This is generally called cherry picking, usually found in verbal statements of most politicians.
The economic data being presented only showed changes from the second quarter to the third quarter. Thus, the quarterly data quoted by Trump did not describe the dynamics on the annual basis. This was done deliberately by Trump to get electoral support ahead of the election day.
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Indeed, if the economy was measured on an annual basis (not from quarter to quarter), the US economy actually still experienced negative growth of around 2.9 percent. Technically, that means the US economy had entered a period of recession. For two consecutive quarters the country\'s economy experienced negative growth, in which previously in the second quarter of this year it contracted 9 percent.
Apart from the biased data presentation or cherry picking allegation, it is hard to deny that there were signs of improvement in the US economy in the third quarter. This is because almost all components of US GDP experienced rapid growth from the second quarter to the third quarter. Investment, for example, grew 83 percent, imports grew 91.1 percent, spending and exports also increased by 40.7 percent and 59.7 percent, respectively.
US President Donald Trump watches a video of his opponent former US Vice President Joe Biden during a Make America Great Again rally at Miami-Opa Locka Executive Airport in Opa Locka, Florida on November 2, 2020.
What exactly was done by Trump? Why was there a substantial change in the third quarter compared to the previous quarter?There were three reasons that can explain the appearance of recovery. The first reason was related to political consensus. All political actors in the US appeared to agree to launch and provide prompt policy responses. In previous economic crises, especially in 2008, such a rapid political consensus did not emerge strong enough. At that time, there were actors and the economic sector to blame, namely the financial sector, which created controversy and long political debate in Congress.
However, this time, the cause of the economic crisis did not come from the negligence of economic institutions. This political awareness and consensus was the basis for launching a policy design for intervention.
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The second reason was related to the amount of fiscal intervention. The identification being carried out shows that the size of the stimulus package that has been launched from this fiscal intervention is extraordinary, reaching US$2.5 trillion. This stimulus package consists of three major program schemes, namely the Response Supplement Appropriation Act, the Families First Coronavirus Response Act and Coronavirus Aid, Relief and Economic Security Act.
It is interesting to note that the entire stimulus package worth a total of US$2.5 trillion can be disbursed in March 2020. Compared to previous periods, the size of Trump\'s stimulus package funds was indeed very monumental.
During Bush\'s period (2008), the Economic Stimulus Act was only US$152 billion. During Obama\'s time, the stimulus policy through the American Recovery and Reinvestment Act reached US$787 billion, plus US$700 billion issued through the Troubled Asset Relief Program (TARP). The size of the stimulus package\'s funding also implies serious concerns among key US policymakers about the economic impact of the Covid-19 pandemic.
Such concern was reasonable considering that in the past 14 years, the US economy never experienced a drastic shrinkage in the first quarter by more than 30 percent. During the 2008 global financial crisis, the deepest point of depreciation was only around 8 percent.
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The third reason was related to institutions. The entire scheme and various stimulus programs provided did not face institutional constraints in their distribution. Stimulus programs to deal with shocks on the demand side, for example, were channeled through a cash transfer mechanism popularly known as helicopter money.
Direct assistance schemes were also provided to deal with supply-side shocks through loan and grant assistance schemes, both for corporations and for small and medium enterprises.
Direct assistance was also given through the unemployment insurance mechanism, which was given directly for four months. This does not mean that interventions were given solely to cope with demand-side shocks. Direct assistance schemes were also provided to deal with supply-side shocks through loan and grant assistance schemes, both for corporations and for small and medium enterprises.
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Those three important points above, namely political consensus, fiscal intervention for stimulus and institutional support, were key words to address the economic impact of Covid-19 in the US. All three may explain why there has been a rapid change from the second quarter to the third quarter in the US. The chain of these three causes explains why the components of GDP in the US — both in terms of consumption, investment and exports — experienced a quite rapid increase from the second to the third quarter.
Sharing the pain
What lessons or reflection can we take? Comparing Indonesia with the US may be inaccurate and far-fetched. The ratio of the size of the GDP or the size of the economy of the two countries is very different.
However, there were two simple reasons why this reflective note should be kept. First, there was a similarity between the two. For example, on the contribution of consumption. This component accounts for the largest portion in both countries. In Indonesia, the portion (of consumption) is 54-58 percent while in the US it is in the range of 67-69 percent. Then, the investment component is also the second largest contributor in the two countries, namely 30 percent in Indonesia and 16-17 percent for the US.
It came with a note: Indonesia\'s larger imports were because of falling commodity prices.
On the export and import side, the two countries also have similarities in their percentage of GDP, where Indonesia accounts for 23-24 percent while the US 12-16 percent. It came with a note: Indonesia\'s larger imports were because of falling commodity prices.
Second, all policy designs in times of crisis are universal. Basically the design is aimed to share the pain (pain sharing). Fiscal intervention is part of the policy recipe for sharing the pain. The point is to help the most affected communities during economic crisis.
Most international financial institutions, such as the International Monetary Fund (IMF), the World Bank and the Asian Development Bank (ADB), also offer policy interventions to their member countries. Indonesia is also not left behind. Indonesia has launched a draft policy to share this pain with the presence of the Government Regulation (PP) No. 23/2020 on National Economic Recovery (PEN).
The identification being carried out showed that there was a similarity with the US. There was a strong political consensus at the elite level in Indonesia to share this pain by immediately drafting policies for fiscal intervention.
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The government regulation on economic recovery, which served as the architecture for launching the pain-sharing policy intervention, was rapidly drafted. It’s almost without political resistance. It’s an extraordinary achievement. The budget deficit limit, which was previously 3 percent of GDP, has been removed until 2022. There will be no more long-winded discussions in the budget legislative process to undertake fiscal intervention to face this panic impact.
Judging from the second reason, namely the amount of fiscal intervention undertaken, the magnitude can be compared proportionally to the size of the respective economy. The fiscal intervention policy drafts that are issued are also quite impressive. Indonesia is actually not too far behind developed countries when using the ratio of the size of the intervention with GDP.
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President Joko Widodo welcomed the arrival of the US Secretary of State, Mike Pompeo, at the Merdeka Palace, Jakarta, on Sunday (5/8/2018).
A study conducted by Albert Cavallo and his team (2020) confirms this. The magnitude of Indonesia\'s fiscal intervention is actually above the average for developing countries. If the intervention rate for developing countries is at 3.64 percent of GDP, Indonesia is at an average ratio of 4.05 percent. Meanwhile, the average fiscal intervention in the US and developed countries was 12.42 and 6.66 percent.
Execution problem
It seems that what is problematic is not the policy design but the policy execution. The institution for executing policy still shows serious problems. This can be seen from the absorption capacity of the PEN budget, which is still not running optimally.
From a quick and concise analysis of a Statistics Indonesia (BPS) report as of 5 November 2020, it can be seen that Indonesia\'s economic growth from the second quarter to the third quarter was more supported by government consumption, which grew 16.93 percent compared to the previous quarter or 9 percent compared to the same period of last year.
This process causes a gap or time interval that is long enough to spur consumption at the public level so that public consumption only grew by 4.7 percent, which means that it has failed to keep up with the accelerated impulse of government consumption.
This happens because some of the stimulus are budgeted through the ministry before being distributed to the community. This process causes a gap or time interval that is long enough to spur consumption at the public level so that public consumption only grew by 4.7 percent, which means that it has failed to keep up with the accelerated impulse of government consumption.
It is also interesting to note that the budget allocated to corporations has not been absorbed at all until last October. In short, the issue facing Indonesia in the future is not its technocratic ability to make policy designs, but in its ability to execute policies. The classic challenge must be to find a solution, both technocratically and politically, so that it does not become a missing link in the entire process of executing the policy.
Makmur Keliat
Makmur Keliat, Lecturer in International Political Economy, School of Social and Political Sciences, University of Indonesia
