Tuesday night was a fantastic night for Republicans up and down the ticket. All the forecasts and punditry going into election day were, put simply, flat out wrong. This year was supposed to be the Democrats’ big moment to push back on previous Republican wave elections in the House and Senate and above all, retain the White House. Instead, as we all know, Donald Trump and the Republican Party had a resounding victory. Mr. Trump’s victory, in particular, has made a mockery of the punditry, election forecasting, and polling industry which trivialized his chances from the beginning. The President-elect and his supporters may be elated by having successfully stuck it to the political elites but their real challenge of governing lies ahead.
On that note there is some cause for optimism and much more for concern for what the next four years will look like for America’s economy. If Mr. Trump sticks to some of his worrying campaign promises we’re in for some trouble. Judging from his released first 100 day in office agenda it seems that’s where we may be headed. Although Mr. Trump is starting out with some of the right ideas on economics, he will seriously need to reverse course on many of his positions, listen to prudent advisors, and allow the influence of Republican policy wonks in the House and Senate if he intends to be a successful President.
The area of economic policy where Mr. Trump’s ideas are most encouraging is tax reform. His plan to reduce both corporate and personal income tax rates should be welcomed as a driver of economic growth. At 39.5% the United States has one of the highest corporate tax rates among modern economies. Mr. Trump’s plan to cut this figure down to 15% would make the United States more competitive in attracting corporate investment, which would lead to higher wages, more jobs, and economic growth. Additionally, the impact on the budget is likely to be small. Corporate tax contributions to total government revenue is down from previous decades at a current 11%. Therefore, the economic growth from a 15% corporate tax is likely to offset relatively small revenue losses. Mr. Trump’s plan to significantly reduce personal income taxes is similarly good for growth but will have a larger impact on the budget. Cutting income taxes, by allowing people to keep more of their own money, would boost consumption spending and further grow the economy. The problem is that such tax cuts are more likely to lead to serious revenue losses since income tax revenue makes up 47% of total government revenue. If Mr. Trump’s plan was paired with serious proposals to reduce spending this policy would be less concerning. The problem is that it isn’t.
Throughout the campaign Mr. Trump has steered clear of offering serious solutions for the primary driver our national debt: entitlements. Entitlement programs such as Social Security, Medicare, and Medicaid make up 2/3 of our government’s budget, yet Mr. Trump barely speaks about reforming them. Instead, during the Republican primaries he insisted that he could balance the budget by eliminating the Department of Education and by cutting waste, fraud, and abuse. As demonstrated throughout the campaign by fact checkers, the numbers don’t even come close to eliminating our nearly half trillion-dollar deficit. Additionally, the new administration plans to work with congress on a trillion-dollar infrastructure stimulus and more spending on the military. Although there may be a good case for spending more in these two areas, with the backdrop of major tax cuts and a reluctance to get serious on entitlements, this looks like a recipe for major deficits over the next four years. One can hope that the Republican Congress might be able to check some of this budgetary recklessness. An encouraging development is that Mitch McConnell, the Republican Senate Majority leader, has reportedly told Mr. Trump the day after the election that his infrastructure spending plan will not be treated as a priority.
The most egregious area of Donald Trump’s economic agenda comes on trade in which the candidate appears to be sticking to his campaign pledge of enacting tariffs on imports from other countries. Mr. Trump’s misguided war on free trade will devastate the US economy and hurt the poorest Americans among us. Economists since Adam Smith’s famous Wealth of Nations was published in 1776, have been in almost unanimous agreement that trade is key to economic progress. Indeed, on May 5th, 1930, at the beginning of the Great Depression, 1,028 economists from across the United States came together and published a statement urging President Hoover to veto the harmful Smoot-Hawley Tariff Act. Hoover ignored the advice and signed it into law resulting in a trade war that reduced world trade, American imports, and American exports which worsened the effects of the Depression. The same lesson holds true today. Mr. Trump’s proposal to increase tariffs as much as 45% would raise the prices of goods, weakening American consumers’ purchasing power and standard of living. Additionally, since many goods are made from materials and inputs from around the world, trade barriers would raise production costs for American businesses and therefore raise the prices of domestic goods not directly subjugated to Mr. Trump’s tariffs. A trade war like the one caused by Smoot-Hawley would be equally as damaging today as it was then. The Petersen Institute for International Economics puts the private sector job losses from Trump’s trade plan at 4.8 million.
Mr. Trump’s short-comings on policy appear to originate from him not giving the issues much thought. Mr. Trump has done well in an election year that focused more on character attacks than on substance. However, now is the time to get serious. For months, allies of Mr. Trump have been explaining away his weakness on policy by arguing that he will have the best advisors and that a Republican congress will reign him in when he’s wrong and help guide the way. Let’s hope they’re right.