Trump – DONALD TRUMP’S ECONOMIC PLAN

Author: Lorenzo Giusepponi
December 2017

After a long and bitter campaign for the US presidency, Donald Trump has triumphed over Hillary Clinton . The Republican is now the 45 th American President and his first term is from 2017 to 2021 . His economic plan focuses on ” making America great again .” Trump entered the White House flanked by Republican majorities in both houses of Congress, but his prior clashes with Republican leaders, particularly with House Speaker Paul Ryan, suggest that he may have trouble passing his entire legislative agenda . Democrats, meanwhile, may act to block some of his proposals, despite their Congressional disadvantage . On the one hand, for Trump’s supporters he represents a chance to shake up a system that many Americans feel has increased inequality and squeezed living standards, on the other, for less complacent investors, there are worries Trump’s anti-globalization mantra will spread protectionism around the world, put up trade barriers and curb global economic growth .

Reactions after the news of his victory

Trump was not always clear and consistent about his policies, and when he was, they were often unorthodox enough to have unpredictable consequences . This resulting uncertainty helps explain the market reaction to his win in the early morning of November 9, 2016 . The Dow Johns, S&P 500 and Nasdaq indexes, as well as the European, Japanese and Chinese stock markets, began to fall . Then, except in the case of the Mexican peso, which continued to slump against the dollar, these initial reactions reversed themselves . Here are then, Trump’s plans in the major fields of the economy .

Growth

During the third televised debate, Trump promised to bring GDP from 1 % up to 4 % and even higher, to 6 % annually . Trump believes in supply-side economics, that is the theory that says increased production drives economic growth . Supply – side fiscal policy focuses on businesses . Its tools are tax cuts and deregulation. Companies that benefit from these policies hire more workers . The resultant job growth creates more demand which further boosts growth . But Arthur Laffer, the originator of that theory, says tax rates must be higher than they are today for the strategy to work . Treasury Secretary Steve Mnuchin is less gung – ho, telling Congress that the administration’s target is 3 % or higher . The Tax Foundation is more sanguine about Trump’s prospects . The think tank projected in September that his policies would increase GDP by 6.9 % to 8.2 % over the long term .

Jobs

The Peterson Institute for International Economics ( PIIE ) wrote in September 2016 that it expects Trump’s policies, if implemented, to set off ” a trade war that would plunge the US economy into recession and cost more than 4 million private sector American jobs .” Moody’s is only slightly less pessimistic, arguing that Trump’s policies would result in 3.5 million fewer jobs after four years, with unemployment rising to perhaps 7 % from its current level of 4.9 % . Trump said he wanted to create jobs by eliminating outsourcing and bringing jobs back from Japan, China and Mexico . The problem really exists . The U.S. lost 34 percent of its manufacturing jobs between 1998 and 2010. Many were outsourced by U.S. companies to save money . Others were eliminated by new technology, including robotics, artificial intelligence and bio-engineering . Government – sponsored training for these specialties might create more jobs for U.S. workers than would Trump’s trade war .

Taxes

Here again, Trump has played into frustrations among many Americans over their sense of financial insecurity, inequality and squeezed incomes . Trump, who has faced fierce criticism for appearing to escape paying income tax himself for almost two decades, promised tax cuts for all income groups . He has also said he would “ ensure the rich pay their fair share ”. But analysis by the Tax Foundation has found Trump’s tax plan would disproportionately help the richest Americans, saving them millions . On December 17 House and Senate Republicans released the text of a bill to overhaul the federal tax code, with final votes expected the following week . Among the many things, the bill would retain the current structure of seven individual income tax brackets, but in most cases it would lower the rates . It would end the individual mandate, a provision of the Obamacare that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019 . Also, it would change the measure of inflation and set the corporate tax rate at 21 % .

Trade

On his campaign site Trump promised to ” negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit, ” asserting that decades of free-trade policies were responsible for the collapse of the American manufacturing industry .
• Mexico and NAFTA : Mexico has come in for particular criticism ; Trump repeatedly threatened to slap 35 % tariffs on cars imported from Mexico . At $ 74 billion, vehicles were the largest category of imports from Mexico in 2015, according to the U.S. Trade Representative’s website . The U.S. had a $ 67.5 billion trade deficit with Mexico in goods in 2015, but a $ 9.6 billion surplus in services . Trump has also singled out the North American Free Trade Agreement ( NAFTA ), which he called the ” single worst trade deal ever approved in this country “. Trump is expected to call for NAFTA to be renegotiated or to withdraw from it altogether ; he appears to have authority to pull out of the agreement by giving six months’ notice, according to article 2205 of the treaty . Some experts believe he would need Congress’ support, however .
• Trans – Pacific Partnership : The Trans – Pacific Partnership ( TPP ), a trade agreement that the U.S. signed but did not come up for a ratification vote in Congress, would have reduced trade barriers among 12 Pacific Rim nations . The pact’s prospects were already dim before Trump’s election made it a dead letter . On January, Trump signed an order to withdraw from further negotiations on the deal, promising to replace it with a series of bilateral agreements .
• China : The president has also criticized China, claiming that it suppresses the value of its currency, the yuan, in order to gain an export advantage . While China maintained a dollar peg that held the yuan’s value down from 2008 to 2010, the evidence now suggests the government is intervening to lift, rather than lower, the yuan’s value . The country’s foreign currency reserves fell from nearly $ 4 trillion in March 2014 to just over $ 3.1 trillion in October . Even so, Trump promises to declare China a currency manipulator and impose tariffs of up to 45 % on its exports .

Infrastructure

Trump has promised to dramatically increase infrastructure investment . His most notable project is the wall he has promised to build along the border with Mexico. He insists that Mexico will reimburse the U.S. for the cost of the wall, which he has estimated at $ 5 billion to $ 10 billion . Independent estimates and Senate majority leader Mitch McConnell have put the cost as high as $ 25 billion . Beyond the border wall, Trump has made early moves to encourage other infrastructure projects such as improvements to the electrical grid and telecommunications systems, as well as repairs and upgrades to highways, bridges, ports, airports and pipelines .

Healthcare

Trump has promised to repeal and replace the Affordable Care Act, commonly known as Obama care . About 20 million people have insurance thanks to the ACA but the scheme has struggled to run efficiently because it relies on competition between insurers to provide affordable coverage, and that competition has dwindled. In the early days of Trump’s administration, there was little clarity about what would replace Obamacare . Trump had proposed measures during the campaign such as funding Medicaid, allowing insurers to sell across state lines, importing drugs, allowing patients to deduct insurance premiums from their tax returns and allowing them to shop around for the most cost – effective treatments .

Immigration

Trump made immigration a centerpiece of his campaign from the time he announced his candidacy in June 2015 . He proposed changing federal law to prevent those born in the U.S. to undocumented parents from automatically gaining citizenship . He wants immigrants to be selected on the basis of “ their likelihood of success in the US and their ability to be financially self – sufficient ”. After the expiration of the 120 – day travel ban, which prevented all immigrants from 7 Muslim majority countries from entering to the US, Trump is to allow them to enter again, with stricter rules for applicants from 11 ” high risk ” nations . Applicants will be restricted for a 90 – day review period . The Department of Homeland Security will collect more biographical data such as the names of family members and places of employment . Trump also promised to deport the 2 million to 3 million immigrants in the United States illegally who have criminal records and asked Congress to withhold federal funds from ” sanctuary cities . ”

National Debt

Trump repeatedly criticized the growth of the national debt – which stands at nearly $ 20 trillion as of January 30 . Independent analyses, on the other hand, see Trump’s plan to lower taxes and boost spending on infrastructure and defense as adding trillions to the debt .

Energy

Donald Trump has repeatedly called climate change a ” hoax “. In May, Trump said he would renegotiate last year’s Paris Agreement, which saw 195 states pledge to limit average global temperature rises to well below 2 degrees Celsius above pre – industrial levels . The United States is responsible for 20 percent of the world’s carbon emissions . It would be difficult for the other signatories of the Paris Agreement to reach their goal without U.S. participation . Trump said he wanted to negotiate a better deal, but leaders from Germany, France and Italy said the accord is non – negotiable . China and India joined the other leaders in stating they remain committed to the accord . It will take four years to formally withdraw . That means it will become an issue in the next presidential election .

Trump’s plan for the first hundred days included a promise to ” cancel billions in payments to U.N. climate change programs and use the money to fix America’s water and environmental infrastructure . ” On October 2017, the Trump administration announced it would repeal the Clean Power Plan which was designed to lower carbon emissions by 2030 to 32 % below 2005 levels . The repeal would withdraw Obama – era limits on carbon emissions at U.S. power plants . That was part of Trump’s campaign promise to revive the coal industry while remaining committed to clean coal technology . Trump claimed this would raise wages by $ 30 billion over seven years . The chief of the EPA, Scott Pruitt has recently signed a measure to repeal the act, but the proposal will now have to go through a formal public-comment period before being finalized, a process that could take months . Trump also pledged to allow more drilling on federal lands of shale oil and natural gas and there are also worries he will curb investment into renewable energy sources .

Monetary policy

This is not strictly an area for the government, given interest rates are set by the US central bank, the Federal Reserve, widely referred to as the Fed. But there were worries during the presidential race that a win for Trump would undermine its independence . The president – elect has previously accused the Fed of keeping borrowing costs low to help president Obama and has said the central bank’s policies have created a “ false economy ” . In an interview with Fortune magazine, Trump also said he “ absolutely ” backed efforts to diminish the Fed’s power . The Fed has a Congressional mandate to generate maximum employment ( 4.5 % to 5 % unemployment ) and steady prices ( annual core PCE inflation of 2 % ) . Aside from those requirements, however, it is independent, meaning it does not have to seek approval from any branch of government to change monetary policy . Given Trump’s accusations that the Fed is acting politically, some have expressed the worry that Trump will attempt to curtail monetary policy independence, as several past presidents have done .

To date we can see a disconnect between the performance of financial markets and the real. While stock markets continue to reach new highs, the US economy grew at an average rate of just 2 % in the first half of 2017 – slower growth than under President Obama . For the first three months of 2017, 533,000 people have found jobs but that is the lowest March quarter total since 2011. Inflation is low, and corporate profits are soaring . High market valuations that are fuelled by liquidity and irrational exuberance do not reflect economic realities .

Sources:

- www.investopedia.com
- www.thebalance.com
- www.theguardian.com
- www.fortune.com
- www.forbes.com
- www.bbc.com
- www.nytimes.com