Trump 2.0: Doubling Down on Trumponomics

Let’s face it, talk is cheap. Former President Donald Trump talks up a storm. However, there is a reason that he is back again as the Republican party presidential candidate, he is believed to have delivered on the conservative agenda during his four years in the White House, and the conservative base trust him to deliver on that again.

Trump’s four years in the White House saw Tax Reform in line with the Conservative agenda passed, regulations rolled back, a laundry list of tariffs and threats of more including what morphed into a trade war with China, and a few other policies characterized more as social and political that were put in place or pushed for in line with party expectations. In the last couple days, he has proposed and promised more of the same policies should he get reelected. At a recent rally he advanced the following agenda:

·      Increase tariffs on imports by as much as 20%

·      Continued deregulation especially in the energy industry

·      More tax cuts

·      Resolve the Social Security problem

·      Pay off the U.S. Federal Debt

·      Other policies that are characterized more under social and political like deporting illegal immigrants, and preventing another world war.

The Deficits Achilles’ Heel

Things though, are not always as they appear. Among the sins of Conservative led governments in the U.S. has been their failure to deliver on deficit reductions, and perhaps even more than during Democratic party led governments, federal government budget deficits have soared under their watch.

Deficits are the yearly shortfall of tax revenues given spending outlays. That is, when tax revenues are too low compared to spending plans, and so the government must borrow to make up that difference. The modern mantra of the Conservative party is to call for tax cuts. Small government implies this, however, that is one side of the equation, the side that does not help the deficits but increases it, all things being equal. The other side that should reduce it, is to decrease government spending, and this is a perennial problem.

In an ideal world, this meshes with Conservative ideology. Small government would mean a reduced spending footprint in addition to low taxes. However, government of all stripes finds the allure of spending too hard to resist. Political handwaving occurs when the public’s attention is made to focus on tax cuts, and on reduced spending on certain programs and departments like environment and Welfare, and voila, the agenda is being actualized, but in reality it isn’t.

Tax cut benefits accrue disproportionately to the rich, and this reduces tax revenues, as their pre-tax cut tax rates are not on the right of some optimal rate, for which revenues increase as rates fall (the Laffer curve argument). The spending cuts on the other hand are miniscule compared to this shortfall, so it is not surprising that following the tax reform, deficits as a share of GDP increased from 3.4% in fiscal year 2017 to 3.8% and 4.6% respectively in 2018 and 2019. In 2020, it ballooned to 14.7%, but that was the pandemic year, so isolating how much of this was tax reform related would require a well-designed causal analysis, as would the others, but given the promises made, the outcomes don’t fit.

More precisely, we saw a decline in the percentage share of revenues out of GDP, from 17.1% in fiscal year 2017 to 16.3% for both 2018 and 2019, and falling again to 16.1% in 2020. While the percentage increased again in 2021 and 2022, it is plausible that this represents inflationary effects associated with bracket creep. Inflation rates rose dramatically in the March to 4.2% and climbed even higher all the way through the summer of 2022 when it peaked at 9.1%.  However, because the FED had not acted all through 2021 to raise rates, as the concern was about a potential double dip recession, it is argued that any tax bracket indexing by the IRS was probably less than it should have been, as once inflation was considered a real problem and being aggressively addressed through policy measures, the ratio again fell significantly in 2023. Further, spending outlays as a percent of GDP fell from 20.6% in fiscal year 2017 to 20.1% in 2018, it rose again to 20.9% in 2019. However, the breakdown of spending showed that discretionary spending remained the same at 6.2% in both 2017 and 2018, and increased in 2019 to 6.3%.

The broad spending changes that the government makes when it highlights spending cuts are with discretionary spending and since that ratio has essentially remained unchanged, it is apparent that spending cuts were simply rearranged into other discretionary spending increases. Tax cuts without spending cuts by a greater proportion will keep the yearly deficits rising and this was the case both during the Trump administration and continuing into the Biden era as the Trump tax reform policy remained in place.

Well, President Trump continues to wave the conservative magic wand of more tax cuts if he is elected. He also adds to that promises to pay off the federal debt, and to save Social Security, both are problems directly related to insufficient government revenues, which are the necessary implication of tax cuts.

Cheap Talk

It stands to reason that if anyone is running for office making promises associated with a problem that is very old, and has been or is currently an incumbent, it should be asked why these were not addressed in the past. If during his time in office Trump did not pay off the federal debt, and solve social security, in particular for the two years while he had a unified government, how is that supposed to happen, especially when the math does not check out?

It is politics. It is what the constituents want to hear. I say it is a pipedream and I will eat crow if he gets into office and implements both tax cuts and a resolution (or credible path to one) of both social security and the federal debt. They are not compatible goals.

Tariffs, Deregulation… Trumponomics all over again

Among the most significant features of Trumponomics were his tariff and deregulation policies. Deregulation is easy to understand as a hallmark of conservative policies. Regulation is seen as statist interference in markets and unelected bureaucratic overreach. The hardcore free marketers will not be convinced about market failure arguments for government regulation and essentially counter that there is scope for regulatory capture and cronyism through regulations, in addition to the burdensome costs they impose on businesses, thus contributing to supply side constraints that would be relaxed with deregulation.

OK, this debate will probably see no concession by either side, but what is the argument to be made for tariff policy? It is often not understood what tariffs are or do, so I will provide a very succinct description.  An import tariff is a tax on our freedom to purchase a product from abroad.  It is a regulation of our purchase choice. What then is the rationale for why the much-maligned regulation becomes a wonderful thing so good that Trump is all excited to impose tariff as high as 20%. In other words, impose a more stringent regulation here? The knee-jerk response is nationalism. We should buy American, and save jobs.

There are two problems with that statement. First, it is first rate hypocritical to advocate this and not shut down our own export industries. Why should foreigners buy American? OK, let me concede at first blush on grounds that we are selfish. Mercantilism does advocate for such policies as our welfare as a nation is primary. So, we encourage and promote our exports but prevent and discourage imports. Well, let us think this through. With what will foreigners purchase our exports? Their currency? The only reason that Americans will accept foreign currency as payment for exports is because that foreign currency can be used to purchase… well, foreign products.

This is true however you cut it. If foreigners must convert their currency to US dollars to pay for our exports, whoever is making that forex conversion is giving up the ability to purchase US products to hold foreign currency. For what purpose? If not to purchase foreign products. So here is the reality, the only way in the long run our export industries can thrive, is if foreign export industries in relation to us also thrive. Mercantilism is not nationalism, it is cronyism. It is redistributing income from U.S. exporting industries to U.S. import competing industries.

The second and related problem with that statement is the failure to realize what our ability to spend less on an import than to buy it domestically does. It frees up more of our income, to spend on other things domestically. Therein lies the inefficiency of tariffs. Our overall consumption bundle is reduced because we could have purchased identical products from abroad and more of other things domestically, than when we are forced through tariffs to spend on the more expensive domestic import substitute.  As should be obvious, we are not saving jobs, just redistributing them to the inefficient protected industries from other industries which would have had to hire workers and produce more to meet our additional demand, after purchasing the cheaper imports.

It should not be surprising that on the issue of trade, economists are almost unanimously agreed that free trade should be promoted. There are situations where import tariffs may be considered optimal, but the conditions are very stringent and ultimately require that the other country does not retaliate, that is impose its own tariffs on our exports. In practice these conditions are tenuous at best and so tariffs are unequivocally inefficient.

Taking stock

My focus has been on the explicitly economic parts of Trump’s proposed agenda should he be reelected as President. What I have hoped to shed light on is that from an economics point of view, the devil is in the details. Promises made with a straight face, that use the right language, that highlight the flaws of the opposition will resonate among the target constituents. Whether the policies are credible as promoting the country’s best interest is something that often needs a little more thought. The Trump 2.0 agenda is contradictory as the economic objectives are sharply pitted against each other. Stripped down it is good old redistributive politics masked with rhetoric that is economically unfounded.