NS3040 Summer 2018 Assessment of Donald Trump’s Economic Policies Europa brazil economy

Overview Neil Iwin “The Contradiction at the Heart of Donald Trump’s Economic Policy, NYT November 17, 2016 Center piece of economic policy is U.S. trade deficits Pledged to eliminate them and create resurgence in American manufacturing Also pledged Tax cuts Infrastructure spending and Deregulation

Economic Program I Set of policies has led markets to expect: Faster economic growth, and thus Higher interest rates in coming years These developments will Drive value of dollar higher Since election day dollar up 3.6% against index of six major currencies Value of Mexican peso has fallen 11% against dollar

Economic Program II Implications of these market changes: Stronger dollar makes it harder for American manufacturing to compete overseas It gives an advantage to companies that locate operations elsewhere and It will, all else equal, tend to make the trade deficit higher rather than lower

Economic Program III If he follows through on policy mix he has hinted at so far: Combination of loose fiscal policy (more spending on defense and infrastructure and tax cuts), and Tighter monetary policy (Federal Reserve increasing interest rates faster than previous plan) Combination would cause dollar to move decisively higher General rule – 10% rise in dollar would increase the current account by 1.0% to 1.5% of GDP Would make eliminating the $500 billion trade deficit $180 to $270 billion harder

Overview Martin Feldstein, “Squaring Trumponomics With Reality”, Wall Street Journal, November 15, 2016. Trump’s challenge is to reshape tax and spending laws to: increase economic growth, raise living standards, and protect America’s economic future. Must do this in a way that is fiscally responsible.

New Policies I Jobs and corporate taxes Although some local pockets of high unemployment the economy is essentially at full employment with 4.9% unemployment rate in October Key to better jobs is increased business investment in equipment and research to raise labor productivity Need to be supplemented by more skill training in firms and community colleges Tax reform could induce U.S. companies to bring back some of $2 trillion of profits held abroad and provide incentives for firms to spend those funds on investment and training Need to tax repatriated profits substituting a low tax for the full U.S. corporate tax rate 10% tax would provide strong incentive for bringing profits back rather than reinvesting them abroad

New Policies II International trade rules Trump promised to tear up NAFTA agreement if he could not negotiate a substantial improvement Revoking the agreement would put more than $600 billion of U.S. exports to Canada and Mexico in jeopardy U.S. companies now export more to Canada than they import from Canada Including Mexico total NAFTA imports exceed exports by less than $40 billion – about ¼ of 1% of GDP NAFTA would benefit from being updated to reflect changes in the economy that have occurred in last 22 years This can be done without scrapping the entire agreement by negotiating “side agreements” to protect U.S. interests.

New Policies III National Debt and Social Security Ratio of government debt to GDP has more than doubled in last decade to 76% Projected to continue rising to more than 85% by 2026 on its way to 85% the next decade and 100% the following decade Cutting spending on defense and nondefense discretionary expenditures cannot reverse the debt explosion Defense outlays already scheduled to fall to 2.7% of GDP from 3.2% over the next decade Lower than any level since WWII – needs to be reversed if military is to protect the U.S. and its allies.

New Policies IV Reducing budget outlays requires slowing growth of Medicare, Medicaid, ObamaCare and Social Security Reforms in health care should help, but uphill battle because of the aging population, and technical changes that provide opportunities for expensive but effective health care Reforming Social Security which now pays out more than it takes in is critical Today’s benefits are paid only by drawing down the “trust-fund balance” accumulated in previous years Accounting gimmick that adds to the overall budget deficit. In 20 years the trust fund will be exhausted, requiring a 25% cut in benefits or major jump in taxes Need to gradually raise age for full benefits to 70 years from 67 for those younger than 55.

New Policies V Infrastructure Although bipartisan support for spending on roads, bridges and other infrastructure Should be postponed until an economic down turn creates the deed for fiscal stimulus Meanwhile would be good to devote those dollars to reducing the national debt while drawing up specific investment plans for the downturn.