What a Donald Trump economy might look like
Will Donald Trump make America's economy great again if he's elected president? With the Republican National Convention scheduled to focus on economics today, perhaps that will bring more clarity to Trump's vague and sometimes contradictory discussions of his economic ideas.
Based on what we can learn from his speeches, media appearances and his website, what do we know about his economic proposals? Let's start with what Trump gets wrong about the economy and then turn to the things he gets right.
What Trump gets wrong:
Tax cuts are the key to higher economic growth: Trump would cut taxes significantly for individual and businesses. The tax cuts would occur at all income levels, but the biggest benefit by far would go to those at the top of the income distribution.
Analysis of the plan by the Tax Policy Center suggests it would increase the federal budget deficit by $9.5 trillion over the first decade and an additional $15 trillion over the next 10 years. Trump claims that he'll close the current budget gap in eight years by eliminating government waste, cutting foreign aid and closing programs such as the Department of Education and the Environmental Protection Agency. However, those measures would make only a tiny dent in the budget hole his plan causes.
Trump also claims the budget shortfall would be eliminated through the large boost tax cuts would give economic growth. However, while tax cuts may have some positive effect on economic growth, a half of a percent is a generous estimate. As the evidence from the Ronald Reagan and George W. Bush tax cuts have made clear, the main effect of lower taxes for the wealthy is to redistribute income upward -- a trickle-up policy. The Reagan and Bush tax cuts weren't the magic elixir for economic growth that Republicans promised when they were enacted.
I should note that in response to criticism, Trump has turned to Larry Kudlow and Stephen Moore to revamp his tax plan and that it hasn't been finalized yet. But it's not hard to imagine what sort of proposal will emerge, given that both have long been advocates of the idea that tax cuts for the wealthy spur economic growth. Kudlow and Moore also cling to the discredited claim that such cuts will pay for themselves and reduce rather than increase the budget deficit.
When the new plan emerges, we'll likely hear promises that it will do wonders for the economy without creating a large budget deficit. But those claims shouldn't be taken seriously.
Renegotiating trade deals will make America's economy great again: Trump has made renegotiating trade deals with China and other countries a centerpiece of his economic policies, a policy he claims would bring jobs back to the U.S. There's no doubt that globalization has had a large negative impact on jobs for the middle class; about a million jobs have been lost according to estimates. But trade is just one component of the economic troubles that the middle class has experienced in recent years.
Even if Trump were wildly successful in those renegotiations, shifting 1 million to 2 million workers back into manufacturing would have only a modest impact on America's 140 million-job economy. That alone will not solve the troubles of the working class.
If the negotiations don't go Trump's way and countries like China don't go along, he has promised to put large tariffs on imports from the countries that refuse to meet his terms. The resulting trade war that would come about as other countries retaliate and impose their own tariffs on imports from the U.S. is unlikely to have the devastating economic consequences that some analysts have predicted. Protectionism reduces both exports from the U.S. and imports to the U.S., so it's hard to say what the net effect will be.
My bet is that the net effect would be negative, and it would reduce the variety of goods available to Americans, but it would be unlikely to create a serious economic downturn.
In any case, a better solution to working-class economic woes would be to implement policies such as enhanced support for workers' rights to bargain collectively for higher wages and a bigger share of the economic pie, affordable college education, access to health care, increased Social Security benefits and progressive taxation that redistributes the gains from trade widely instead of allowing them to be concentrated at the top of the income distribution.
The focus on renegotiating trade deals is a diversion from the broader discussion the country needs to have.
Free market reform of health care will eliminate Obamacare's "incredible economic burden": The expansion of health care under the Affordable Care Act has created new jobs in the health care industry, reduced financial insecurity for working-class families, made it easier to change jobs without losing health insurance, reduced the growth of health care costs, freed money to be spent elsewhere in the economy and allowed millions of people who were previously uninsured to have health care coverage. That hardly constitutes an "incredible economic burden."
Health insurance markets suffer from well-known and significant market failures. A free market for health insurance will not work. The question is how to best regulate health care markets to make them as efficient and inclusive as possible. Obamacare represents an attempt to overcome the market failures in health insurance markets without resorting to the universal care system (or, single payer) that has worked so well in other countries. While Obamacare could be improved, a fair-minded assessment would conclude that it has been a success.
Trump's plan, as The New York Times reports, is "exasperating Republican experts on health care, who call his proposals an incoherent mishmash that could jeopardize coverage for millions of newly insured people." His ideas do not fit together in a way that would overcome the market failures in health care markets, and he offers nothing to replace coverage for the millions of people who would be uninsured once again if Obamacare were repealed. The appeal to free-market principles may sound good on the campaign trail, but Trump's health care plan has little substance.
Repeal Dodd-Frank: In the wake of the financial crisis, it became clear that new regulations were needed to rein in Wall Street and reduce the chances of another financial meltdown. Trump has vowed to repeal Dodd-Frank because of the effect it has had on bank lending. To the extent that this is true, the largest effect has been on small community banks due to increased compliance costs, but the effect has been fairly small. To solve that problem, regulations for these banks need adjusting rather than throwing away the increased safety of the banking system that Dodd-Frank has brought about.
Repealing Dodd-Frank would allow large financial institutions to return to the practices that resulted in the financial crisis with very little benefit in return. Dodd-Frank did not go far enough, and large banks have worked hard to weaken the proposals that were enacted, which has left us less safe than we ought to be. Dodd-Franks needs to be strengthened, not repealed.
Here's what Trump gets right:
Social Security and Medicare should be protected: Social Security and Medicare have been essential in reducing poverty among the elderly and ensuring they have access to needed health care. Trump is correct to promise not to cut these programs. But the question is whether this promise is credible.
If Trump is elected, Republicans will likely control both the Senate and the House, and we can expect they'll implement tax cuts for the wealthy, resulting in a much larger budget deficit. Perhaps Republicans will be willing to live with a bigger deficit -- as they have in the past when tax cuts didn't produce the promised economic boom and the tax revenue. But it's more likely that they'll use the increased deficit as a reason to cut government spending.
If so, with Congress in Republican control, it's more likely they'll try t0 satisfy their long-standing desire to reduce entitlement spending. One of Trump's promises -- cutting taxes, balancing the budget or protecting Social Security and Medicare -- would have to be abandoned. Since the tax cuts would be very unlikely to be reversed, would Trump veto bills that cut entitlements, or give in to the pressure to do something about the ballooning budget deficit?
Infrastructure spending: Trump has not put forth a specific plan for infrastructure spending, but he has mentioned a "trillion-dollar rebuilding plan" for America. That certainly is needed, along with the jobs it will create. But again, how likely is this promise to be fulfilled after cuts in taxes, which will certainly have a higher priority among Republicans, blow a hole in the government's finances?
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Much like his health plan, Trump's economic proposals are a mishmash of half-formed ideas with no clear direction or guiding principle. Just days away from being the Republicans' official nominee for president, Trump is under the illusion that running a country is much like running a business. CNN.com has reported that he says he knows all the smart businessmen who should be running things in Washington. People like billionaire hedge fund manager Carl Icahn.
"I'd love to bring my friend Carl Icahn," Trump said on MSNBC's "Morning Joe" in mid-June. Trump also mentioned private equity titan Henry Kravis and former GE CEO Jack Welch as top Treasury Secretary candidates.
Setting the many doubts about Trump's business acumen aside, the skills required to run a business are very different from those needed to effectively manage the economy. His economic proposals, along with his plan to put the "smart businessmen" types who guided us into financial collapse and the biggest economic downturn since the Great Recession in charge of the economy don't inspire confidence in his ability to bring economic prosperity to those who have struggled so much in recent years while those at the top have done so well.