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What the economy would look like under a hypothetical Trump presidency


Julia Pham

By

October 28th, 2016


As a Trump Presidency is looking increasingly unlikely, Julia Pham examines the GOP candidate’s economic policies and explains how we dodged a bullet.


Contrary to Donald Trump’s claims, the majority of polls predict that Hillary Clinton will become the 45th President of the United States in two weeks’ time. At the time of writing, FiveThirtyEight conservatively has Clinton at an 85% chance of winning the election [1].

Given that a Trump presidency is looking increasingly unlikely, we can look at his proposed economic policies and examine the potential consequences they could have had on America, and the global economy, with renewed enthusiasm.

 

Tax Plan and Government Spending

The Trump campaign’s tax plan involves an overhaul of the tax code, with cuts to every income group and a reduction of the top bracket’s marginal rate from 39.6% to 25%, as well as decreasing the business tax rate from 35% to 15%. Implementing these cuts would shrink the tax base significantly – according to the Tax Policy Center, Trump’s plan would reduce federal revenue by $9.5 trillion over ten years [2].

How Trump wants to pay for the tax cuts is not clear. A Moody’s Analytics report released earlier this year suggests that if Trump wants to fully implement the tax cuts and not add to the federal deficit, he would need to cut government spending by 20% [3]. This is at odds with his reluctance to change the structure of two of the biggest drivers of government spending, Social Security and Medicare. In addition, his proposals to increase spending on national defence and veterans’ healthcare would result in the US taking on an even heavier debt load, reducing fiscal stability overall. Perhaps in response, Trump has confidently stated he can ‘renegotiate the national debt’, although whether the United States can forego market capitalism and successfully negotiate its debt remains to be seen.

 

Trade

Typically, Republican presidential candidates have emphasised the importance of eliminating restrictions on businesses, through reduced taxes and free trade, to lower the price of goods and labour. Trump instead has adopted a more protectionist stance in an attempt to ‘protect American industries’, which involves renegotiation of the NAFTA agreement and withdrawal from the Trans Pacific Partnership.

His proposals to slap a 45% trade tariff on China and a 35% tariff on Mexico (a violation of NAFTA) would prove disastrous. Moody’s believes that imposing these tariffs would raise import prices by 15% and inflate overall consumer prices by 3% [4]. Raised prices would also lead to a far less productive economy as resources in the international market are less likely to be allocated efficiently.

The tariff increases could also have negative implications for foreign policy. China and Mexico are the US’ two biggest trading partners, with respectively $500 billion and $300 billion in goods and services being imported annually. There would be nothing to prevent them retaliating with in-kind tariffs on US imports, which would hurt American businesses even more as the two countries together account for a quarter of total US exports. On top of that, economic uncertainty and higher costs of production would deter global businesses from expanding and investing in the United States.

While it is undeniable that globalisation and free trade have negatively affected US manufacturing, isolating the US economy is not the way to support American industries. Given that exports account for a huge proportion of US GDP, Trump’s economic nationalism could very well backfire on American businesses and instigate an international trade war.

 

Immigration

One of the hallmarks of Trump’s campaign has been his controversial stance on immigration. His proposal to deport 11 million undocumented immigrants, while popular among the electorate, is costly and unfeasible. Deporting 11 million immigrants, who make up 5.1% of the labour force, would make hiring workers more expensive and thus increase costs for American firms. Industries that depend on cheap immigrant labour, such as agriculture, would be devastated, and the cost of food would sharply rise.

 

Even so, election promises and statements in interviews should not be taken at face value. Even if Trump did become president, these policies would not be passed without being significantly watered down by Congress. Having said this, it is clear that Trump’s proposals are fiscally unsound, and would wreak havoc on both the American and global economy, possibly causing a recession reminiscent of the 2008 Global Financial Crisis. It is also worth noting that the Economist Intelligence Unit ranks Trump winning the US election at number six on its top global risks, just below the rising threat of jihadi terrorism and above a clash of arms in the South China Sea [5].

Despite this, we should refrain from analysing Trump’s policies and thinking ‘crisis averted’. As Trump’s economic advisor Tom Barrack put it, ‘One thing we know about economists is that they never get it right.’

 

References

Image: AP,. (2016). Trump using a placard at a rally. Retrieved from http://wlrn.org/post/donald-trump-calls-obama-founder-isis-rally-broward-focuses-economy

[1] Who will win the presidency?. (2016). FiveThirtyEight. Retrieved 26 October 2016, from http://projects.fivethirtyeight.com/2016-election-forecast/?ex_cid=rrpromo

[2] Nunns, J., Burman, L., Rohaly, J., & Rosenberg, J. (2016). Analysis of Donald Trump’s Tax Plan (p. 1). Tax Policy Center. Retrieved from http://www.taxpolicycenter.org/publications/analysis-donald-trumps-tax-plan/full

[3] Zandi, M., Lafakis, C., White, D., & Ozimek, A. (2016). The Macroeconomic Consequences of Mr. Trump’s Economic Policies (p. 3). Moody’s Analytics. Retrieved from https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf

[4] Zandi, M., Lafakis, C., White, D., & Ozimek, A. (2016). The Macroeconomic Consequences of Mr. Trump’s Economic Policies (p. 7). Moody’s Analytics. Retrieved from https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf

[5] Global Forecasting Service. (2016). The Economist Intelligence Unit. Retrieved 25 October 2016, from http://gfs.eiu.com/Archive.aspx?archiveType=globalrisk

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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