With Donald Trump as President, Here's What Will Happen to the U.S. Economy

in #usa7 years ago

Editor's note: This story was originally published in October 2015. As Donald Trump is inaugurated as the 45th president of the United States, it is worth taking a look at what the U.S. economy might look like under his proposed policies. Also, check out our Donald Trump Stock Portfolio, a list of 15 stocks that could do well under President Trump. The introduction and the sections below on immigration, taxes and trade have been updated.

There's no denying Trump has done a good job of making himself rich -- he's worth somewhere between $4.5 billion and $10 billion, depending who you ask. Can he make the rest of America rich, too?

Trump was inaugurated as the 45th president of the United States on Friday, becoming perhaps the most unanticipated figure to ever enter the Oval Office. The economy will be at the top of Trump's agenda as president and serve as the most important barometer of his performance.

On the campaign trail, Trump admitted the economy wasn't something he looked forward to tackling. In a January 2016 interview with "Good Morning America," he offered up a bleak assessment and added that, in terms of fixing it, it's a task he'd rather skip.

"We're in a bubble," he said. "And, frankly, if there's going to be a bubble popping, I hope they pop before I become president because I don't want to inherit all this stuff. I'd rather it be the day before rather than the day after, I will tell you that."

In a subsequent April interview with the Washington Post, Trump reiterated his doomsday view of the economy, suggesting we might be headed for recession. But that time around, he appeared more open to the idea of his being in charge of finding remedies.

"I can fix it. I can fix it pretty quickly," he said.

He'll soon have a chance to put his -- or rather, our -- money where his mouth is.

Trump was the 2016 election cycle's most riveting figure. He initially focused his attention on immigration reform, calling for a wall to be built between Mexico and the United States and demanding the deportation of 11 million undocumented immigrants. He has wavered on that last point, now promising to initially focus on criminal undocumented immigrants, but he has stuck to his guns on the wall.

He later rolled out other policies and positions: a major tax code overhaul; repeal and replace Obamacare; renegotiate or "break" NAFTA; stop hedge funds from "getting away with murder" on taxes; reforming the Veteran's Administration; and impose import tariffs as high as 35%. All while keeping the deficit in check, growing the economy and leaving entitlement programs like Medicare and Social Security untouched.

Those who fear Trump's plans should find common cause with those who love them: "I'm not sure how much of what he actually says today will be his positions a year from now," said Michael Busler, professor of finance at Stockton University.

"Take Trump seriously, but not literally," has become a common refrain. Trump's own campaign suggested he is playing "a part" to garner votes.

While Trump certainly has some grandiose ideas -- and equally lofty rhetoric to accompany them -- deciphering the exact nature of his economic policies is a complex task. Not to mention he won't have a free pass from Congress, even though it remains under Republican control.

Here are some insights into what the U.S. economy and markets look like under President Trump if he is able to push his agenda through Congress.

Trump's Expensive Immigration Plan

Trump's immigration plans cost him a handful of business deals, but they might cost the United States much more.

The American Action Forum, a right-leaning policy institute based in Washington D.C., estimates that immediately and fully enforcing current immigration law, as Trump has suggested, would cost the federal government from $400 billion to $600 billion. It would shrink the labor force by 11 million workers, reduce the real GDP by $1.6 trillion and take 20 years to complete (Trump has said he could do it in 18 months).

"It will harm the U.S. economy," said Doug Holtz-Eakin, president of the American Action Forum and chief economic policy adviser to Sen. John McCain's 2008 presidential campaign. "Immigration is an enormous source of economic vitality."

The effect would be felt on both supply and demand

A number of industries that depend heavily on cheap immigrant labor would be devastated -- especially agriculture. "There would be an abrupt drop in farm income and a sharp rise in food prices," said John McLaren, professor of economics at the University of Virginia with expertise in international trade, economic development and the political economy.

Companies that sell to the immigrant population would be affected as well, leading to decreased revenues for local businesses and a loss of American jobs.

"Immigrants, whether they are legal or illegal, always spend a portion of their earnings in the location where they have their jobs," McLaren said. "And in a lot of our urban centers, this is actually an important part of the economy."

He pointed to the case of Postville, Iowa, where in 2008 U.S. Immigration and Customs Enforcement (ICE) raided a slaughterhouse and meat packing plant, detaining 389 undocumented workers (and jailing 300 of them). The raid caused most of the more than 1,000 immigrants not caught to leave the town of 2,300, devastating the local economy in the process.

He also noted his own research, which suggests each immigrant creates 1.2 local jobs for local workers, most of which go to U.S. natives. "Obviously, those jobs would disappear if the undocumented were just yanked away," he said.

It is worth noting that Trump appears to have backed away from his mass deportation stance slightly, outlining priorities that would lead to the deportation of what The Washington Post estimates would be 5 million to 6.5 million immigrants. He has warned, however, that "anyone who has entered the United States illegally is subject to deportation."

Trump has also discussed reducing the number of jobs held by legal immigrants, namely by increasing the prevailing wage requirements for H-1B visas (visas that allow U.S. employers to recruit and employ foreign professionals) -- an element of his plan that is often overlooked. His thesis is that doing so would force companies to give jobs to domestic employees instead of overseas workers. The maneuver would benefit some, but not most.

"If I'm an American software programmer, I probably would benefit somewhat from making it harder for highly-skilled software programmers from elsewhere," McClaren said. "It's really hard to argue that the country, as a whole, benefits from that. It would be bad for most Americans, and it certainly would be bad for corporations."

An extreme anti-immigration policy could also cause collateral damage to the American image. "What's the American brand after we've rounded up 11 million people and sent them packing?" said Jim Pethokoukis, a columnist and blogger at the American Enterprise Institute, a center-right think tank based on Washington, D.C. "Do people still view America the same way?"

Perhaps it's a good thing the real estate magnate's immigration plans are essentially impossible to implement in full.

Tax Cuts for Everyone, and Deficits, Too

Trump's tax plan, unveiled in September, is perhaps the most detailed proposal he put forth while campaigning. It entails implementing tax cuts across the board, though some in the middle class would see their tax bills go up.

"His tax plan is one of the most dynamic and pro-growth tax plans out there," said Merrill Matthews, resident scholar at the Institute for Policy Innovation, a Texas-based, right-leaning think tank. "You would find a huge amount of new business investment and companies willing to put their money out there to begin growing the economy."

Trump's tax plan stacked up fairly well against his fellow Republican presidential primary contenders. It wasn't as drastic as proposals put forth by Ted Cruz and Ben Carson but did, like most GOP tax structures, favor the rich.

Perhaps the biggest distinguishing feature of Trump's proposal is his hard cap on business taxes at 15%, which might be especially appealing to freelancers and the self-employed.

But there's a catch: Trump's tax plan would reduce revenue enormously, and the federal budget deficit would almost inevitably skyrocket.

Nonpartisan tax research group the Tax Foundation calculated that Trump's plan in its original form would cut taxes by $11.98 trillion over the course of a decade. It would lead to 11% growth in the GDP, 6.5% higher wages and 29% larger capital stock as well as 5.3 million jobs. However, it would also reduce tax revenues by $10.14 trillion, even when accounting for economic growth from increases in the supply of labor and capital.

"That tax cut would produce faster economic growth and a bigger economy -- as long as you pay zero attention to the fact that it would dramatically increase the deficit and budget debt," said Pethokoukis.

Trump in August adjusted his platform, calling for a top income tax rate of 33% rather than a past plan for 25% as well as the full expensing of capital investment and a deduction for childcare costs.

An updated version of the Tax Foundation's analysis determined Trump's more fleshed-out tax plan would reduce federal revenue by between $4.4 and $5.9 trillion, depending on how it handles pass-through businesses. The group noted that the change would reduce the revenue loss from his original plan, but it would depend significantly on how wide the new bracket thresholds are.

Trump has promised to reduce spending, though he hasn't explicitly said how. Moreover, he has said he will maintain entitlement programs like Social Security and Medicare, two of the costliest parts of the federal budget.

"If there weren't any spending cuts that materialized, you would see the deficit widen substantially the moment the plan was enacted," said said Alan Cole, an economist with the Center for Federal Tax Policy at the Tax Foundation.

In the face of such an enormous deficit, creditors might begin demanding higher interest rates on U.S. bonds, and the markets would be spooked.

"I can't imagine markets would react well to it. I can't imagine global investors looking to relocate will look on a United States that is driving deliberately over a fiscal cliff," said Holtz-Eakin. "Sending the U.S. into a debt spiral where you're borrowing interest on previous borrowing will generate a market reaction that will be far from benign and that will, I think, in the end overwhelm the beneficial effects."

Of course, just because Trump hasn't yet explained how he will cut spending doesn't mean he won't. "It's not unusual for a politician to say, 'I'm going to cut spending,' and not give specifics," Matthews saidtrump.jpg

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@iamneeraj
Great writeup!
Keep sharing.

Thank you @qagiri .....will keep sharing for sure