Donald Trump’s Economic Consequences
The phenomenon of Donald Trump is something that we have not seen before in American politics – A professional promoter and reality television star who has enthralled a portion of the nation and gained more traction than anyone thought possible. While he makes headlines with some of his more outlandish statements, like calling news anchors bimbos and promising to pay legal fees for people who “rough up” protestors at his rallies, it is important to look into his actual policy proposals. What would a Trump presidency actually look like? How would the economy fare? This post looks to examine those questions.
Policy 1: Declare China a Currency Manipulator
From the Donald Trump campaign website:
Economists estimate the Chinese yuan is undervalued by anywhere from 15% to 40%. This grossly undervalued yuan gives Chinese exporters a huge advantage while imposing the equivalent of a heavy tariff on U.S. exports to China.
The U.S. Treasury’s designation of China as a currency manipulator will force China to the negotiating table and open the door to a fair – and far better – trading relationship.
First of all, it is important to note that the Chinese government is currently spending billions in currency reserves to strengthen the yuan. Hedge fund managers are losing money in 2016 betting that the yuan is overvalued and will eventually need to depreciate. Both of these suggest the opposite of what Mr. Trump is declaring – that the Yuan is not artificially low, but in fact is actually high.
Either way, Mr. Trump has said that unless the Chinese government dramatically increases the value of its yuan, he will impose a 45% tariff on all goods coming into the U.S. from China. To find out what the potential impact of such a policy might be, we can actually look at a recent example.
In 2009, the Obama administration put a 35% tariff on Chinese tires in order to dissuade predatory pricing and protect jobs in the U.S. tire industry. As stated in this article by the National Review, (link here) the policy did manage to add about 1,200 jobs in the tire industry; however, it also caused an increase of costs to the U.S. consumer of about $1.1 billion due to increased tire prices. China also retaliated with tariffs of their own. Specifically, the U.S. poultry industry saw its exports to China reduced by 90%.
So while there may be an increase in jobs as Mr. Trump suggests, the costs for these jobs would be extremely high. There would also be a very high risk of retaliation having adverse effects on the very industries these policies are trying to promote. Agriculture is one of the largest exports to China and would therefore be one of the more vulnerable industries in that scenario which would be bad news for farmers.
Policy 2: Make Mexico Pay for a Wall Across the Border
Again, from the Donald J. Trump campaign website:
Mexico must pay for the wall and, until they do, the United States will, among other things: impound all remittance payments derived from illegal wages; increase fees on all temporary visas issued to Mexican CEOs and diplomats (and if necessary cancel them); increase fees on all border crossing cards – of which we issue about 1 million to Mexican nationals each year (a major source of visa overstays); increase fees on all NAFTA worker visas from Mexico (another major source of overstays); and increase fees at ports of entry to the United States from Mexico [Tariffs and foreign aid cuts are also options]. We will not be taken advantage of anymore.
Mexico, as you may have heard, has not taken too kindly to this proposal. They will not simply go along with a U.S. proposal which forces them to pay tens of billions of dollars to build a wall along the entire border. So what would be the economic impact of this stand-off?
First of all, Mexico is our second largest trading partner behind only Canada. According to the Office of the United States Trade Representative website there are more than $250 billion in exports that go to our southern neighbor, which is more than to China and Japan combined. If Mexico responded by imposing tariffs or other trade barriers there are a significant number of U.S. industries that would be severely impacted. Specifically, according to a website powered by MIT called the Observatory of Economic Complexity, the auto-industry in the United States exports over $20 billion worth of cars, trucks, and parts to Mexico. Our energy industry exports over $25 billion of refined and unrefined petroleum products there as well. These industries would take a big hit in a trade war with Mexico.
While securing the border may be an important priority, most people knowledgeable on the topic suggest that building a wall is one of the worst ways to go about it. Even if Mr. Trump can get Mexico to pay to build the wall, the cost to maintain and man the wall could be over $750 million per year according to this estimate from Politico. There is also not much evidence to suggest that a fence or a wall would be that effective in some of the more remote areas of the border. For those parts of the border that are in remote mountainous terrains, a fence is simply one more obstacle to cross.
Policy 3: Tax Reform
From the Donald J. Trump Campaign website:
This plan simplifies the tax code by taking nearly 50% of current filers off the income tax rolls entirely and reducing the number of tax brackets from seven to four for everyone else. This plan also reduces or eliminates loopholes used by the very rich and special interests made unnecessary or redundant by the new lower tax rates on individuals and companies.
I think most people are in favor of simplifying the tax code. And actually Mr. Trump’s plan sounds good in theory. Unfortunately, everything needs to be judged from a basis of where we are now, and what it would take to get to a new tax structure. This is where the Trump tax plan falls into trouble. While it is great to say we are going to eliminate and/or reduce taxes on people, the country is already running a budget deficit so that lost revenue needs to be made up somewhere. Here is what some organizations are suggesting about the Trump plan:
From the taxfoundation.org: Mr. Trump’s plan would cut taxes by $11.98 trillion over the next decade on a static basis. However, the plan would end up reducing tax revenues by $10.14 trillion over the next decade when accounting for economic growth from increases in the supply of labor and capital.
From the taxpolicycenter.org: The plan would reduce federal revenues by $9.5 trillion over its first decade before accounting for added interest costs or considering macroeconomic feedback effects. The plan would improve incentives to work, save, and invest. However, unless it is accompanied by very large spending cuts, it could increase the national debt by nearly 80 percent of gross domestic product by 2036, offsetting some or all of the incentive effects of the tax cuts.
Furthermore, there would not be much relief for the middle class. Right now the marginal rate for a married couple making a combined $100,000 is 25%. Donald Trump’s plan would reduce that to 20%. Meanwhile, the richest Americans would get a much bigger tax break, going from a top rate of 39.6% down to 25%. He is also proposing to eliminate the estate tax, which currently does not kick in until an estate reaches over $10 million in assets. Because the very wealthy tend to save and invest more of their tax gains, as opposed to the middle and lower classes who tend to spend more of their windfalls, the economic impact of such a tax break would be weaker than it otherwise could be.
Conclusion:
Donald Trump may be a rare presence in American politics for his ability to make highly offensive and non-sensical statements which actually gain him support, however his policy proposals are not anything unique. Politicians have been promising the sky with no ability to actually deliver since ancient times. Pandering to base fears and human greed is nothing new – The Donald, as a professional pitch man, is merely better at it than most.
Until next time…
“We hang the petty thieves and appoint the great ones to public office.” – Aesop
Photo Credit: Gage Skidmore via Flickr.com