Donald Trump has promised a lot. His critics have, correctly in many instances, pointed out that he has been vague on how he will make America Great Again. But we can take a look at his general economic agenda and make a judgment on whether it can deliver the robust economic growth that he advertises. In particular, Trump maintains that we do not need to reform entitlement programs but that we can grow the economy sufficiently under his plan to pay for the current stream of obligations. Most economists estimate that the U.S. economy would need to grow at approximately 8% per year to meet this goal — something that no American economic expansion has come close to achieving in modern times.
The Trump economic plan essentially has three main components. First, encourage the repatriation of 2 trillion dollars that U.S. corporations have earned overseas but can’t bring back because of tax consequences. Second, reform the tax code. Third, get tough with our trading partners, particularly China, Mexico, and other countries that are “ripping us off.”
On the first point, there really is not much difference between Trump and the rest of the Republican field. They all want to reduce the corporate tax rate and reform the corporate tax structure and have proposed various “tax holidays” to lure money back into the country. So, from that standpoint, Trump offers nothing special. But it should also be noted that the impact of luring that money back to our shores is greatly overstated. The theory is that big U.S.-based multi-national corporations will bring all that money back home and invest it here, creating jobs. But the reality is a lot of that money already is here. When corporations park money overseas the just don’t bury it in a hole. Most of that money is sitting in big multi-national banks, including many U.S.-based banks. And those banks are using those funds just like they do any other funds — they lend them out to clients looking to finance promising business activities, including in the United States of America. And American companies with significant overseas operations aren’t going to repatriate all that money back into the U.S. either. They will keep a significant amount overseas to finance those operations.
So, yes, reducing the tax penalty that is keeping money outside our borders will help with economic growth here. But its impact will likely not be huge, as Trump suggests, but rather marginal.
On tax reform, Trump’s plan is similar in kind to that of Rubio and Kasich. All reduce rates and remove some deductions (though Rubio increases the child tax credit). The big difference with Trump is the scope of his reductions, slashing the top rate all the way to 25%. (Rubio has only a modest decrease in the top rate, with a more generous reduction for “middle class” taxpayers). The big negative to Trump’s plan is that, despite his claim that his lower rates are “paid for” by eliminating deductions, the fact is that the analyses of independent economists show that Trump’s plan is far from revenue neutral (even making reasonable allowances for related economic expansion) and would, in fact, result in enormous deficits. The Tax Foundation calculates that Trump’s plan would result in $10 trillion of additional deficits over the next decade.
We can say, based on economic theory as well as observed history, that a tax plan like Trump’s (or Rubio’s or Kasich’s) will spur some economic growth, at least in the short to mid-term. If, however, Trump can’t grow the economy as fast as he advertises, his plan will also come with expanding, not shrinking, deficits which will serve as an economic drag further down the road.
For some historical perspective, Ronald Reagan instituted a large across-the-board tax cut at the start of his first term. During the ensuing economic expansion (that is after the end of the 1981-82 recession) GDP growth averaged a bit over 4% per year over the next 8 years (before the 1991 recession). Can Trump realistically say that his proposals can grow the economy over the long-term twice as fast as did Ronald Reagan’s? No, that’s just the populist politician talking. Indeed, the Tax Foundation economists estimate the Trump tax plan, all other things being equal, would increase GDP by about 1% per year. That’s not bad, but nothing close to what Trump is promising. Again, that’s not nearly enough growth for Trump’s tax cuts to pay for themselves, let alone pay for the continued growth of entitlement programs. And by the Tax Foundation’s estimates, GDP growth under Trump’s plan would be slightly less than under Rubio’s (and Rubio’s would not create more deficit spending).
Lastly, Trump touts a trade policy aimed to keep jobs in America and even bring them back. The way he will do this is a little unclear, but appears based on “getting tough” with our trading partners by imposing significant tariffs on countries he deems are not “fair traders” and even, somewhat problematically, on individual U.S. companies who move operations outside of the country (or potentially grow foreign-based operations but not U.S. operations, or curtail U.S. operations but not foreign operations — the policy is vague and potentially capricious). Most economists will agree that such protectionist trade wars do not save U.S. jobs. Indeed, they cost jobs. Targeted countries will enact their own punitive tariffs on U.S. goods, costing jobs in U.S. industries and agriculture. And there is no guarantee that the industries being targeted by us will bring operations back to the U.S. Shifting the location of manufacturing operations is a long and expensive process, and companies don’t take such actions based on trade policies that are likely temporary. In the meantime, those imported goods carrying high tariff duties will still be coming in from China or Mexico and will just cost U.S. consumers more money — which they will then not have available to spend on other goods and services. Trump’s trade policy is a jobs killer.
Furthermore, Trump’s specific allegation that China keeps the value of its currency, the yuan, artificially low in order to undercut the prices of U.S. goods is simply false. It is something they have done in the past, but for more than a year China has actually been intervening in the currency markets to try to keep the value of the yuan higher than what market forces are dictating. Last August, when China relaxed the value peg on the yuan in its bid to get the IMF to include the yuan in its basket of “reserve currencies,” the yuan promptly fell by about 3%. As China’s economy has been weakening, the Chinese government has been trying to support the yuan in a largely unsuccessful effort to keep investment capital from fleeing the country. So labeling China a “currency manipulator” may sound tough, but it isn’t going to result in any economic gain for the U.S.
Though Trump declaims that systematic reform of entitlements is not necessary (and criticizes Republicans who say that it is), he has offered a few examples of how we can run things better. For instance, he bewails that we do not “bid out” drugs in Medicare and Medicaid, and conveniently declares that that’s because the pharmaceutical companies have corrupted politicians, but since he doesn’t need their money he’ll change that. The big cost for drugs, however, is for drugs still under patent protection. Trump doesn’t explain how he will “bid out” drugs that, by law, have only one manufacturer.
For someone who has garnered acclaim for “telling it like it is,” Trump has an awfully hard time telling it like it is. In some cases, such as his often repeated and audaciously shameless fabrication that he loudly warned before the second Gulf War that we shouldn’t invade Iraq and it would destabilize the Middle East (which was the basis of his claim of possessing foreign policy acumen), his claims have clearly had the intent to deceive and strike at the heart of the character issue. As far as his economic statements go, I think we can be more forgiving. There aren’t a lot of politicians out there, after all, who haven’t oversold something based on wildly over-optimistic assumptions, or based on ignorance. But that’s not particularly appealing, either.
The laws of economics are not impressed by bragging and confident bluster. They don’t bend to threats and bullying. Like populist politicians of the past, Trump offers a lot of promises which simply do not correspond with reality. Trump may be a great salesman, but he’s no economist. The likely result of his policies, if implemented as he proposes, would be a mixed bag, but what we can say with confidence is that they would result in ever expanding annual budget deficits.