Thomas “Tip” O’Neill, a Massachusetts Democrat and a speaker of the U.S. House of Representatives from 1977 to 1987, coined a phrase that “all politics is local” to emphasize that voters are primarily interested in issues affecting their areas and communities.

And in spite of different party affiliations, Mr. O’Neill had a close political and personal friendship with the Republican President Ronald Reagan who reflected the voters’ local interest in the most important election campaign question ever: “Are you better off today than you were four years ago?”

The answer to that simple common-sense question floored the Democrat President Jimmy Carter during the debate with Reagan in Cleveland, OH, on October 28, 1980. A week later, Reagan won a huge popular vote and election victory.

After struggling with a 9.9% inflation inherited from Carter, Reagan’s conservative policies led to an economic growth of 3.6% during his eight-year tenure, with a balanced budget, reduced government regulations and restored price stability.

U.S. needs faster economic growth

Some echoes from that political succession sound similar to what we are witnessing at the beginning of the America First administration’s second coming.

Fortunately, President Trump will not have to deal with a huge inflation Reagan had to tame at the cost of a recession, but he is facing a budget deficit of 8% of GDP, a soaring public debt of $36.2 trillion, excessive external deficits and uncooperative trade partners he could not bring to heel during his first term of office.

Trump will have a relatively easy task of restoring sound public finances and narrowing trade gaps, but his most difficult challenge will be to revive a faster and sustained economic growth. To do that, he would have to significantly raise a very low (1.6%) noninflationary growth potential of the U.S. economy.

Let us, therefore, start with this very difficult mission.

America’s noninflationary growth potential of 1.6% is the sum of productivity (1%) and labor supply (0.6%) growth. Those numbers are averages for the period of 2011-2024 to reflect the structural nature of physical limits to economic growth under conditions of stable prices.

The U.S. has to increase the stock and quality of its human capital. More, and better, investments must be made in science and education to produce a highly qualified labor force outfitted with best practice technologies.

If implemented, that policy would bring rising output per unit of labor input – i.e. rising productivity – and declining unit labor costs to anchor price stability.

In the process of doing that, somebody would have to explain why 101.1 million Americans – 38% of the civilian population -- are out of the labor force and practically unemployable. Within the G20 countries, the percentage of Americans in the civilian labor force is down to position 14, higher only than in Argentina, India, Turkiye, Spain, Mexico and South Africa.

A rigorous assessment of national interest

Tackling problems of productivity and labor supply may sound like an odd set of policy issues. But without that, there won’t be faster growth, price stability and balanced budgets.

Trade issues with China, Canada, Mexico and the E.U. should be part of diplomacy rather than trade wars. Tariffs will fuel inflation and lead to less accommodative credit conditions with slower growth. Expected tariff revenues will be offset by weaker growth as inflation erodes households’ real purchasing power and asset prices. U.S. data show that a 1% increase (decline) in nominal GDP growth brings a 1% increase (decline) in total government receipts.

Preserving economic growth is, therefore, essential to reducing budget deficits.

Trump, however, has a strong point in urging trade adjustment on his main trade partners. He remembers a bitter lesson of his first term when China pocketed a net trade income of $1.5 trillion on U.S. trades, followed by E.U.’s $682.6 billion, Mexico’s $367.1 billion and Canada’s $79.1 billion – all that on Trump’s watch and ignoring his calls for more balanced trade accounts.

Turning to security issues, Trump needs peace in Europe and Middle East to stay fully focused on America First economic, political and social objectives.

In that context, a trade war with the E.U. would be an obstacle to creating Europe’s credible and sustainable security architecture. But something will have to give, because the major E.U. countries are setting up a united front to resist U.S. trade demands.

And then peace in Middle East and stability in East Asia require cooperation with Russia and China. Any suggestion of confrontations with nuclear-armed superpowers is a move to doomsday scenarios.

U.S. should carefully weigh its national interests in Europe, Middle East and East Asia in a situation when it faces pressing problems at home.

Jim Baker’s test “do we have a dog in this fight” and Tip O’Neill’s “all politics is local” still sound like a good advice.