When Donald Trump entered the US presidential race last year, many thought it was a joke. Yet, there is one issue on which Mr Trump, a billionaire real estate magnate, is taken seriously by voters: economics. But to properly evaluate what his policies have in store for the US economy, Mr Trump’s business credentials cannot be taken at face value, and we must examine what his economic plan would mean for America.
Trade has been a central pillar of Donald Trump’s presidential campaign, and one of the few issues he has maintained a consistent position on. He has repeatedly espoused the idea that America is “getting screwed” by “lousy” trade deals that have led to a mass exodus of manufacturing jobs to cheap-labour countries, such as Mexico and China. Mr Trump’s answer is to fight back with import tariffs on manufactured goods, suggesting a 45% tax on imports from China and Japan and a 35% tax on Mexican imports.
However, while The Donald is fond of reminding everyone that how intelligent he is, he’s misidentified what’s really going on here: it isn’t trade, but technology which is responsible for most of the job losses in manufacturing. The Centre for Business and Economic Research at Ball State University found that productivity growth, driven by increased use of robotics, caused 85% of the job losses in manufacturing from 2000 to 2010 – a period that saw 5.6 million factory jobs disappear – while trade accounted for only 13% of job losses. It’s not the Chinese that are stealing American factory workers’ jobs; it’s machines.
What would the effect of Mr Trump’s proposed tariffs be? A study conducted by the National Foundation for American Policy, a non-partisan think tank, calculates that the Trump tariffs would manifest themselves as a regressive consumption tax that would cost the average US household more than $2,200 annually.
The poor would be hit the hardest: Mr Trump’s tariffs would cost American households in the bottom income decile up to 18% of their mean post-tax income. Meanwhile, the highest 10% of earners – who spend a lower share of their income on cheap imported goods – would only see their average post-tax incomes fall by 3%. It’s perverse that Mr Trump, a man who ostensibly stands for the interests of working class voters, is advocating policies which would hurt poor households the most.
What’s more, these tariffs are unlikely to prove effective at protecting American manufacturing. If the US imposed tariffs only on China, Japan and Mexico, importers would simply switch to other suppliers – there are more than three countries who can produce goods more cheaply than America. The only way to fully protect US manufactures from foreign competition would be to impose import tariffs on all countries. But this would be even more disastrous. According to the NFAP report, a 45% tariff applied to imports from all countries would lead to a 30.5% increase in the cost of consumer goods, significantly reducing the purchasing power of American households.
Again, the working class would bear the brunt of this with the bottom decile of households projected to suffer a 53% reduction in their income; households in the highest income decile would see their incomes curtailed by 7%.
Another dangerous consequence of Mr Trump’s proposed tariffs is the likely retaliation they would incur from other countries. So far, we’ve only discussed the damage that would be caused if it were only the US to introduce tariffs. However, if Trump were to follow through with his threats it could spark a trade war with one or more of America’s trading partners. Not only would this hurt American manufacturers – and thereby defeating the purpose of the policy in the first place – but it would also make the rest of the world poorer as well.
The key problem with Donald Trump’s assessment of economics is that he sees it as a zero-sum game
The key problem with Donald Trump’s assessment of economics is that he sees it as a zero-sum game. For casino owners and businessmen like Mr Trump, it may be, but for whole countries it isn’t. When two countries trade, both are made better off. In the case of America’s trade with China, the US has seen prices for consumer goods fall substantially, and outsourcing its manufacturing has enabled its workers to move to more productive areas of the economy.
However, that’s not to say there are no losers from trade. Exposing low-skilled workers to competition from cheap foreign labour has inevitably led to some job losses in manufacturing. But this can, and should, be mitigated by government policy and this is where policymakers should be turning their attention. The current offering of transitional aid programmes is inadequate at blunting the sharp edge of capitalism’s creative destruction. Trade Adjustment Assistance, a federal programme launched in the 1960s, consists of extended unemployment benefits and retraining programmes. However, because these benefits are limited to workers who lost their jobs due to trade, they do nothing to help the millions more who are unemployed due to the unstoppable march of technological change. Instead of implementing outright protectionism, American policymakers would be wiser to focus on compensating the losers of free trade and technological progress.
The second major facet to Donald Trump’s economic plan is tax reform. It’s hardly surprising that the Republican candidate of this race wants to cut taxes, but Mr Trump is particularly aggressive in his efforts to reduce the tax burden on American firms and households. Broadly speaking, his tax plan would substantially lower marginal income tax rates, make taxes flatter and less progressive, and scale back deductions and other tax breaks.
Under President Trump, the US tax code would be much less progressive than the current one
On income taxes, Mr Trump would simplify the tax code by consolidating the current seven tax brackets into three, with marginal tax rates of 12%, 25% and 33%. His plans also include an extraordinarily generous increase in the standard deduction – the amount that can be earned before paying income tax – to $25,000, up from $6,300 today. Under President Trump, the US tax code would be much less progressive than the current one. Over one third of his proposed tax cuts on personal income would go to the top 1% of earners, with the average one-percenter receiving a windfall of $275,000; taxpayers in the other 99% of earners would see their tax bill fall by a measly $2,500.
Mr Trump’s also wants to reduce America’s corporation tax rate from 35% to 15%, as well as closing loopholes and reducing tax breaks. On the face of it, this is actually a good idea. The US has the highest corporation tax rate in the OECD, a club of mostly rich countries – it’s higher even than in France! – and, in a world of mobile capital, this incentivises companies to shift their profits to lower tax jurisdictions. Moreover, a higher rate of corporation tax leaves firms with less cash to invest in capital, which stifles productivity growth, leading to slower wage growth. However, such a massive reduction would be costly: The Committee for a Responsible Federal Budget, a fiscally conservative think-tank, estimates this will cost about $2.5 trillion over a decade.
Overall, Mr Trump’s tax plan is actually pretty similar to other tax reform proposals that have been made by Republicans in Congress – he wants to lower, flatter taxes with less loopholes and deductions – but the scale of the changes proposed by Mr Trump is much larger. According to an analysis by the Tax Policy Centre, a non-partisan think-tank, the cost of Mr Trump’s proposed tax reforms – not accounting for their effect on GDP growth – would be $9.5 trillion over the next decade. How President Trump would plug this fiscal hole is as yet unknown – aside from vague references about reducing government waste, he has declined to elucidate – but in order to fully pay for the cuts, government spending would need to be cut by 20%.
Unsurprisingly, Donald Trump – a businessman and a Republican – wants to reduce regulation. A major plank of Mr Trump’s proposed regulatory reform is to repeal the 2010 Dodd-Frank Act, which he claims “has made it impossible for bankers to function” because it makes it harder for banks to lend money and create jobs.
At 2,300 pages, Dodd-Frank is the longest and one of the most complex bills ever to be signed into law in the history of the United States. Its purpose was to promote financial stability by forcing banks to reduce their reliance on debt funding and curb risky behaviour. However, with the largest American banks today still too big to fail, the bill has ultimately failed in limiting the growth and instability of large financial institutions. Furthermore, the myriad of rules and regulations it imposed onto an already highly regulated industry has devastated smaller banks who are unable to absorb the staggering costs of compliance.
So at first glance, it appears Mr Trump may be onto something when he says that Dodd-Frank isn’t working and that the financial system needs to be overhauled. Unfortunately, Mr Trump has yet to elaborate on his plans for financial reforms and, with the low levels of nuance and detail displayed in the rest of his policy proposals, it seems unlikely that he would be able to provide a better alternative.
The Great Wall of Trump
No discussion of Donald Trump’s policies is complete without acknowledging his flagship policy of building a wall along the southern border with Mexico. The border stretches over 1,989 miles, but thanks to natural barriers such as the Rio Grande, the wall would probably only need to cover about 1,000 miles. Mr Trump has claimed that the wall will only cost (Mexico, since they’re apparently going to pay for it) $10 billion. However, the Washington Post fact checker estimates the true cost of the wall would be closer to $25 billion – and that’s not including the cost of maintaining a video surveillance system to keep watch of the border.
The cost of construction and maintenance is not the only issue associated with Mr Trump’s wall, there are practical issues too. Every year, an estimated 350 million border legal crossings are made – many of by daily commuters – through 48 crossing points and 330 ports of entry. Mr Trump has said his wall will have a “big, beautiful door”, but it’s difficult to imagine fitting such a large volume of people through a single door, no matter how big or beautiful it may be.
Rather than making America great again, Mr Trump would make the situation worse, not better
Many Americans mistakenly believe that Donald Trump’s success in business makes him a suitable candidate to run the country and improve its economic prospects. Unfortunately, this is not the case. If implemented in their current form, Mr Trump’s policies would lead to higher prices for consumers, create a gaping hole in public finances, increase inequality and, according to a recent paper by Moody’s Analytics, cause a recession. Rather than making America great again, Mr Trump would make the situation worse, not better and while he does successfully identify some of the problems faced by America, Mr Trump fails to provide any constructive solutions.
The policy which best embodies Trump’s approach to economic policy is the wall: overly simple, outlandishly grandiose, and clearly not thought out. The US needs a strong leader who will enact deep structural and institutional reform, not a brazen demagogue with simple quick-fix solutions. Hopefully in November, reason will trump fear, and Donald Trump will not be the one entering the White House next January.