What does it mean to “Make America Great Again,” economically speaking?
As investors, small businesses, and institutions like the IMF and Federal Reserve grow more skeptical of the Trump administration’s economic policies, the White House has explained how its famous slogan translates into action. It is now dubbed “MAGAnomics,” and it’s serious enough to warrant its own gif:
It’s also very straightforward. Donald Trump and his economic team will create sustained 3% economic growth, a step up from the typical rates recorded in recent years. Mick Mulvaney, director of the White House’s Office of Management and Budget, published a seven-point plan in the Wall Street Journal (paywall) yesterday with details, of a sort, about how to create the “greatest revival of the American economy since the early 1980s.”
Here’s the big claim:
“Over the next 10 years, 3% growth instead of 2% will yield a nominal gross domestic product that is $16 trillion larger, federal government revenues $2.9 trillion greater, and wages and salaries of American workers $7 trillion higher.”
Trump’s White House has already shown a somewhat shaky grasp of budgeting and accounting—including a multitrillion-dollar math error in its latest budget—but let’s address the plan according to its own merits. It’s light on detail and reiterates much of what we’ve heard before from the White House. How feasible are the central tenets of MAGAnomics? Here’s a breakdown:
“We need to boost productivity. Fundamental to that is encouraging capital investment. We’ve seen for decades that growth in private-sector jobs correlates to growth in private business investment. When businesses invest in new plants and equipment, they tend to hire more people, who produce more. Lower tax rates and faster cost recovery are two levers that will reduce the cost of capital and thereby help ignite economic growth. And since 70% of business income goes to wages, the benefits flow to workers as well.”
The White House says its plans to lower corporate taxes would boost investment and job growth. Trump wants to cut the US corporate tax rate to 15%, from 35%.
The US has one of the highest corporate tax rates in world. Tax reform that lowered this rate and broadened the tax base would find lots of fans. However, Trump’s plan does not get rid of tax deductions, like those for mortgage interest or charitable giving, that would allow for cutting the corporate tax rate without leading to huge budget deficits.
“Curbing unnecessary regulation”
“Much like commonsense tax reform, rolling back unnecessarily burdensome regulations will reduce the cost of doing business. When regulations increase costs, they decrease returns, leaving less capital to invest. If they are too burdensome, they discourage any investment at all, as businesses choose to forgo opportunities. This is important to all business, but especially to capital-intensive sectors like manufacturing. Overly zealous environmental regulations have played a role in pushing many U.S. businesses overseas. Requiring realistic and fact-based cost-benefit analyses of regulations will help protect both the environment and American jobs.”
Since taking office, Trump has done his best to roll back as many Obama-era business regulations as possible. His administration has been particularly ardent about getting rid of environmental regulations, like the Clean Air Act.
According to the World Bank’s Doing Business rankings, the US already has the eighth-best regulatory environment in the world for running a company, besting the likes of Germany, Australia, and Japan. Meanwhile, a review by the Environmental Protection Agency of the Clean Air Act found that the benefits of the regulation exceeded the costs by a factor of 30-to-1. However, a focus on cutting regulation in unnecessary state occupational licensing could be a big opportunity for unleashing growth.
“Growth also depends on the size of the workforce. Although the labor pool is aging, we are also seeing people who could be working but are staying home. We badly need them to go back to work. We believe that most want to do this but simply lack the opportunity. Our welfare system often creates disincentives for people to seek work. We intend to change that. We need to reform welfare to ensure it helps those truly in need of it, but does not encourage people to stay home.”
It’s true that the number of Americans in the labor force is falling, and that this has hurt economic growth. Trump administration plans to enforce stricter work requirements to receive benefits and tighten eligibility for programs including food stamps and tax credits.
While some economists agree that programs like disability insurance have contributed to the decline in the labor force participation rate, there is disagreement on how important these factors have been. Structural economic issues, like an aging workforce and a mismatch of skills to available jobs, have also been major contributors. Meanwhile, there’s plenty of evidence that welfare for the poor doesn’t simply make people lazy, but actually has many benefits.
“Smart energy strategy”
“The president’s ‘all of the above’ energy strategy expands the economy’s growth potential. Yes, it puts coal miners back to work. But cheaper, cleaner, more abundant energy will also increase investment and employment across dozens of industries, from chemicals to automobiles. By ensuring reliable supplies and stable prices, the president’s energy plan will reduce uncertainty, especially in the manufacturing sector, thereby reducing the risks associated with building new plants and hiring more American workers.”
The Trump administration’s energy policy is focused on exploiting natural resources with fewer restraints than before, for the benefit of coal in particular and “stable prices” in general. A focus on promoting price stability is one of the stranger tenets of MAGAnomics. Energy prices are already low and relatively stable. This has done little for US economic growth.
Meanwhile, Trump’s promise to grow all energy sectors, especially coal, will leave him with a choice of shifting subsidies from workers in one Republican-voting state to another, or trying to convince fiscal hawks in the Republican-led Congress to simply subsidize everything.
“Rebuilding America’s infrastructure”
“The president’s plan to rebuild America’s infrastructure will create immediate job opportunities. More important, it will boost the long-term productivity of American industry. Rebuilding roads, bridges, airports and ports will pay dividends both now and in the future.”
Trump has proposed a $1 trillion dollar infrastructure plan, with $200 million in direct federal spending over the next 10 years. Boosting infrastructure spending is an area where MAGAnomics falls squarely in the mainstream of economic thought about how to increase jobs and long-term productivity. Researchers at the IMF and OECD agree that infrastructure spending supports growth by making it easier for firms to operate. A recent report by the American Society of Civil Engineers said the US faces a $2 trillion infrastructure funding gap through 2025, and a failure to fill it would cost the US economy almost $4 trillion in forgone economic growth.
“Fair trade for America”
“The president is right in that the U.S. is frequently abused when it comes to international trade. Ensuring that other nations do not undermine our economy by unduly taxing our products, by dumping products here, or by stealing our intellectual property is essential to our economic future.”
If infrastructure spending is an area where MAGAnomics is mainstream, trade is not. Trump has said ”all our trade deals unbelievably bad” and called NAFTA the “worst trade deal in the history of the world.” While reasonable debates can be had about the merits of free trade, almost no economists believe that higher barriers to trade will boost economic growth.
The latest Global Trade Alert report said that there were 2,420 protectionist measures in effect that harm US commercial interests at the end of last year. This year the tide is turning, with the US is become “markedly” more protectionist. In the first six months of 2017, US policy initiatives have hit the commercial interests of G20 partners 26% more often than during the same period in 2016. Meanwhile, G20 countries have been less protectionist against the US.
“Government spending restraint”
“When government spends a lot, it takes money away from private investment. And private investment is always a more efficient allocator of capital than government. We will continue to fund critical government functions, including a social safety net that gives people the comfort of knowing they will not be overlooked while encouraging them to be more willing to take chances. But we will watch every dollar to minimize waste. We will, in short, seek to take from you only what government actually needs to function.”
There is some evidence that reducing government expenditures can lead to growth, but at around 38% of GDP, the US government is already among the rich world’s lowest relative spenders. It’s unclear whether further cuts will have the desired effect.