Can Donald Trump fix the U.S. economy? Or would he make things worse?
Posted May 22, 2016
From the outset, Donald Trump has positioned himself as the brash outsider, the only person running for president who actually understands how the economy works. As The New York Review of Books recently noted, millions of Americans have come to know him as the man they saw on "The Apprentice:" “the business magus, the grand vizier of capitalism, the wise man of the boardroom, a living confection whose every step and word bespoke gravitas and experience and power and authority.”
And that may be why, according to recent polls, more Americans trust him on economic issues than they do Hillary Clinton.
Trump’s forecast for the future of the U.S. economy is not good. In interviews he has said “we’re in a bubble” that’s about to burst and we’re headed for a bad recession. But he’s also told the Washington Post: “I can fix it,” he said in April. “I can fix it pretty quickly.”
Over the past few weeks, Trump has begun to explain how he would do just that, or, in Trump parlance, how he would make America great again. The reviews have been mixed: “Donald Trump’s economic plans would destroy the U.S. economy,” the Atlantic declared earlier this month. The New York Post took a decidedly different tack: “Donald Trump’s policy plans are real, detailed — and great.”
So what does Trump actually propose? And would it work?
As with most Trump policy proposals, his economic plan, on its face at least, is simple and straightforward. According to Trump’s website, “too few Americans are working, too many jobs have been shipped overseas, and too many middle-class families can not make ends meet.” He proposes four goals: tax relief for middle Americans, simplifying the tax code, growing the economy by discouraging corporate inversions, and not adding to the national debt.
Under the Trump plan, “nearly 75 million American households would no longer pay income tax. That’s because anyone who is single and earns less than $25,000 or married and jointly earns less than $50,000 would no longer owe income tax.” Instead, they would “get a new one-page form to send the IRS saying, 'I win.'”
This would take care of over half of all Americans. The rest would “get a simpler tax code with four brackets — 0 percent, 10 percent, 20 percent and 25 percent — instead of the current seven” and no business of any size would pay more than 15 percent of its business income in taxes.
In an op-ed for the Washington Times, Stephen Moore, an economic consultant with Freedom Works, argues that Trump’s tax plan would result in growth and jobs: “The heart of the Trump tax plan is to cut our business tax from the highest in the world down to 15 percent, making our rate one of the lowest. This will reverse the stampede of businesses fleeing America — great companies like Burger King and Medtronics. When the businesses come back, so will good-paying middle-class jobs.”
Moore argues that small businesses will benefit too because “their tax rate falls from close to 40 percent to 25 percent, because business owners pay taxes at the personal income tax rate. This will allow companies to invest more and hire more workers here at home. Getting rid of tax loopholes will help pay for these reductions.”
The Tax Foundation, a nonpartisan tax research group, has estimated that Trump’s plan would cut taxes by $11.98 trillion over the next decade, which would “lead to an 11 percent growth in the GDP, 6.5 percent higher wages and 29 percent larger capital stock as well as 5.3 million jobs.”
But there’s a catch — unless Trump plans to dramatically cut spending, tax revenues would be short to the tune of $10.14 trillion, according to The Street. Trump has said he’d scrap Obamacare but has only offered vague suggestions of other areas of the federal budget he’d trim, while at the same time suggesting he’d increase military spending and not touch Social Security or Medicare.
The Trump tax plan would reduce federal revenue by a quarter, said Alan Cole, an economist at the Tax Foundation, to The Street. “If there weren’t any spending cuts that materialized, you would see the deficit widen substantially the moment the plan was enacted.”
And that could set off a chain reaction that would result in recession, or worse. Creditors might demand higher interest rates on U.S. bonds, which could scare off investors.
“I can’t imagine markets would react well to it. I can’t imagine global investors looking to relocate will look on a United States that is driving deliberately over a fiscal cliff,” said Doug Holtz-Eakin, president of the American Action Forum, to The Street. “Sending the U.S. into a debt spiral where you’re borrowing interest on previous borrowing will generate a market reaction that will be far from benign and will, I think, in the end overwhelm the beneficial effects.”
Complicating matters is that while Trump says he doesn’t want to add to the deficit, if there were a recession he says he’d simply default.
“I’ve borrowed knowing that you can pay back with discounts,” Trump told CNBC, according to The Atlantic. “I would borrow knowing that if the economy crashed, you could make a deal.”
The Atlantic called this policy disastrous: “This wouldn’t just represent a historic default, putting the U.S. in the position of a country like Greece or Argentina; it would also spark an international financial crisis."
Then there are the other costs in Trump’s plan: imposing tariffs as high as 35 percent, deporting 11 million illegal immigrants, building a wall between the U.S. and Mexico and possibly ending free trade between the two countries by renegotiating or ending NAFTA.
Two writers for The American Action Forum, Ben Gitis and Laura Collins, estimated Trump’s immigration policies would cost between $400 billion and $600 billion, shrink the labor force by 11 million workers and reduce the GDP by $1.6 trillion.
Industries that rely heavily on cheap labor, especially agriculture, would be devastated, leading to a rise in food prices, said John McLaren, a professor of economics at the University of Virginia, to The Street.
As for Trump’s plan to impose big tariffs on imported goods, economists worry that it will do little to bring back manufacturing jobs and will instead result in higher prices for American consumers.
“It’s a common mistake the people who don’t really understand economics make that this would somehow be a tariff on exporters,” Mark J. Perry, a professor at the University of Michigan at Flint and a scholar at the American Enterprise Institute, told Politico.
“It would actually be a tax on American consumers. And more than half of U.S. imports come in as raw materials. And those cheap imports benefit American companies that hire American workers to finish the production process. Trump is really harkening back to the outdated mercantilist positions of hundreds of years ago.”