320 Years of History
Gold Member
A fifteen page analysis of the macroeconomic impacts of Trump's proposals has been released by Moody's Analytics. Moody’s Analytics provides economic analysis only and does not endorse or support any political party or candidate, including those in the 2016 U.S. presidential election. The paper is part of the ongoing analysis by Moody’s Analytics of the economic implications of the candidates’ policy proposals in the 2016 U.S. presidential election. Moody’s Analytics has published a series of reports throughout the election cycle analysing the candidates’ proposed tax and economic plans.
From the study:
I've left Scenario 2 for you to read on your own. I haven't even read it yet.
Moody's Analytics examination of Mrs. Clinton's policies has yet to be released. When it is, I'll do the same thing with it....
From the study:
Background:
Three scenarios are considered.
Conclusion Summary by Topic:
Overall Conclusion:
Three scenarios are considered.
- First, we take Mr. Trump’s proposals at face value as outlined on his campaign’s web site and in his speeches and interviews.
- The second scenario assumes that Mr. Trump’s policies are fully adopted, but on a smaller scale than he has proposed.
- The third scenario assumes a President Trump will need to negotiate with a somewhat skeptical Congress, resulting in his policies being scaled back and adjusted in response to political realities.
Conclusion Summary by Topic:
- General Discussion of Taxes and Spending Policies Advocated by Trump:
- Mr. Trump’s tax plan will make the tax code simpler than the status quo, but creates complications. Fewer deductions and breaks in the code will simplify things substantially, as will eliminating alternative minimum taxes. However, allowing pass-through businesses [nearly all Trump's companies are "pass-through" businesses], which are currently taxed at personal tax rates, to instead be taxed at a lower corporate tax rate will complicate things. Without additional rules, enterprising individual taxpayers would be able to become passthrough entities to take advantage of the lower rates. Mr. Trump’s tax plan also does not tackle the thorny question of whether U.S. multinationals should be taxed on a territorial basis, instead of on a worldwide basis as they are now.
- All taxpayers receive a tax cut under Mr. Trump’s plan, but most of the cuts go to those with the highest income.
- The tax code under Mr. Trump’s plan will thus be much less progressive than the current tax code.
- Scenario 1 (see background):
- The U.S. economy will weaken significantly if Mr. Trump’s economic policies are fully implemented as he has proposed.
- The economy will suffer a recession that begins in early 2018 and extends into 2020.
- During this downturn, real GDP will decline peak to trough by close to 2.4%. This would be an unusually lengthy recession.
- Employment will continue to decline and unemployment will rise into the next presidential term, with the unemployment rate peaking at 7.4% in summer 2021.
- For the typical American family, Mr. Trump’s policies will mean that their standard of living will effectively go nowhere, at least during his term in office.
- Stock prices, which will get hammered early in his presidency given the weaker economy and higher interest rates, will make their way back and end his term about where they were when he took office.
- House prices will follow roughly the same path. It will be a difficult four years for the typical American family.
- The economic damage created by Mr. Trump’s policies is also stark when considering how the economy would perform if there were no significant changes to policy. That is, current law regarding tax and spending policy, immigration and trade policies, and all other fiscal policies remain in place. In this current law scenario, employment is expected to increase by 6 million jobs during Mr. Trump’s presidency (see Table 2). This compares with a decline of 3.4 million jobs over the same period if the candidates’ policies are fully implemented.
- Budget and Deficits
- Mr. Trump’s economic policies hurt the economy due in part to the large budget deficits and heavy debt load that result from his tax and spending policies.
- Even on a static basis, the deficit in 2020, the last year of his term, will be close to $1 trillion greater than if there were no changes to tax and spending law. By 2026, the end of the budget horizon, the deficit will be almost $1.6 trillion greater.
- [T]he increased government borrowing causes interest rates to increase, crowding out private sector activities such as business investment, housing, and consumer spending on vehicles and other durables.
- There are some long-term economic benefits from the lower marginal personal and corporate tax rates in Mr. Trump’s proposals.
- Most notably, they would significantly reduce the marginal effective tax rate on investment by nearly 10 percentage points. All else being equal, this would incent more savings and investment.
- The proposals would also have the desirable effect of reducing the cost of equity financing of investment over debt financing, which would reduce leverage in the economy.
- [T]hese benefits are overwhelmed by the mounting deficits and debt and resulting higher interest rates.
- The nation’s debt load rises from 75% of GDP currently to over 100% by the end of Mr. Trump’s first term and more than 130% a decade from now.
- Long-term interest rates are much higher as a result. Over the next decade, 10-year Treasury yields are expected to average 6.6%, compared with near 4% in the current-law scenario.
- Businesses’ cost of capital and households’ borrowing costs are much higher [God help anyone with a "balloon" mortgage/loan], despite the lower marginal rates, which act as a corrosive on investment and ultimately on productivity and GDP growth.
- Immigration and Trade
- Immigration
- The economy also suffers as Mr. Trump’s immigration and trade policies act like a negative supply shock.
- As the immigrants leave, the already-tight labor market will get tighter, pushing up labor costs as employers struggle to fill the open job positions. Many of these positions will go unfilled because, by the time the Trump administration is under way, the U.S. is expected to be at full employment, meaning there will be no slack labor out of which to hire workers.
- [W]here undocumented immigrants work as manual laborers in agriculture, it is unlikely that many natives are interested in performing these labor-intensive jobs even at modestly higher wages. It is even the case that farms that struggle due to labor shortages may prompt native job losses in upstream and downstream industries.
- Mr. Trump’s immigration policies will thus result in fewer jobs, potentially severe labor shortages, and higher labor costs.
- [B]usinesses more aggressively raise prices for their products.
- The tight job market and higher inflation prompts the Federal Reserve to normalize interest rates quickly, and then to push rates above their long-run equilibrium.20 This monetary tightening contributes to the recession that hits about a year after Mr. Trump takes office.
- Trade
- The large increase in tariffs on Chinese and Mexican imports supported by Mr. Trump further exacerbates inflation pressures.
- Slapping a 45% tariff on Chinese imports and 35% on non-petroleum Mexican imports thus increases overall goods import prices by approximately 15%. This in turn lifts overall U.S. consumer prices by almost 3% at its peak six quarters after import prices increase.
- It is unlikely that global manufacturers would expand their operations in the U.S.
- [Chinese and Mexican producers] would retaliate with in-kind tariffs on U.S. imports. [Have you actually been to Mexico or China recently? Our goods are already higher in price than are their domestically produced goods.] This would be a big hit to U.S. exports, as we ship well over $100 billion in products a year to China, and almost $250 billion to Mexico, accounting for approximately one-fourth of total U.S. goods exports.
- The value of the U.S. dollar also rises.
- The hit to U.S. exports from the higher Chinese and Mexican tariffs and stronger U.S. dollar is significant. At the peak of the impact in 2019, U.S. real exports are reduced by nearly $85 billion.
- U.S. trade with the rest of the world will shrink as a result of Mr. Trump’s tariffs.
- If ratified as currently written by Congress, the TPP will have small macroeconomic consequences for the U.S., although most estimates suggest it will add to real GDP and incomes. [Of course, Trump opposes the TPP.]
- The large increase in tariffs on Chinese and Mexican imports supported by Mr. Trump further exacerbates inflation pressures.
- Immigration
- Scenario 3 (see background):
- The U.S. economy is able to avoid a recession in this scenario, but growth comes to a near standstill early in Mr. Trump’s term. Employment barely budges in the first two years, and over his four years as president just over 2.8 million jobs are created. This is about half as many jobs as would be created if there were no changes to current economic policy. Job growth in this scenario is not quite enough to absorb the growth in the working-age population, and unemployment drifts higher, rising to near 6% at points in his administration.
Long-run economic growth also falls short in this scenario. Over the next decade, real GDP is expected to grow by 1.7% per annum compared with just more than 2% under current law. This is a small difference in any given year, but over the years it adds up. Real GDP in 2026 stands at almost $19.7 trillion in this scenario compared with $20.5 trillion under current law. [I'll leave it to you to figure out what the country may have done with $700B, which is a tidy bit more than the entirety of our 2013 defense spending.]
Behind this poorer performance is a smaller workforce as undocumented workers leave and a stronger U.S. dollar prompted by China’s currency liberalization. Contrary to assertions that the Chinese yuan is significantly undervalued, held down by Chinese currency policy, it is somewhat overvalued. This is evident from the large capital outflows Chinese authorities have been working to stem for more than a year. China’s economy has been sputtering, and global investors have turned leery on the country’s growth prospects. Even domestic Chinese investors recognize the likelihood that China’s currency will decline in value and have been pulling money out of the country. The U.S. trade deficit thus increases in this scenario.
There are important long-term economic benefits from lower marginal tax rates and the adoption of a territorial corporate tax system, but these changes are too small in this scenario to have a meaningful impact on growth, at least not over the next 10 years.
- The U.S. economy is able to avoid a recession in this scenario, but growth comes to a near standstill early in Mr. Trump’s term. Employment barely budges in the first two years, and over his four years as president just over 2.8 million jobs are created. This is about half as many jobs as would be created if there were no changes to current economic policy. Job growth in this scenario is not quite enough to absorb the growth in the working-age population, and unemployment drifts higher, rising to near 6% at points in his administration.
Overall Conclusion:
Presidential candidates often put forward proposals that are as much political statements as firm policy positions. No one expects that their proposals will get through the legislative process and into law fully intact. But while the policy proposals put forward by candidates are generally welloverstated, they are a statement on their philosophy and priorities.
Mr. Trump’s economic policy proposals should be considered through this lens. He has suggested that he might be willing to bend his position on taxes and perhaps tariffs. He has even intimated that his policy statements are simply a negotiating stance— he is asking for a lot more up front than he ultimately expects to get.
Having said this, what he is asking for is fiscally unsound. His tax and spending proposals will result in very large deficits and a much higher debt load. A future Congress may be able to rein in this profligacy, but it will not be easy, as there is a gulf between what he says he wants on taxes and spending and what it will take to make the budget arithmetic work.
He is also very suspicious of globalization. His willingness to threaten higher tariffs on U.S. trading partners and his sharp criticism of major trade deals signal a reversal on the long-running expansion of U.S. trade and foreign investment. Requiring millions of undocumented immigrants to leave the country also signals less openness to the rest of the world.
The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the U.S. economy will be more isolated and diminished.
Mr. Trump’s economic policy proposals should be considered through this lens. He has suggested that he might be willing to bend his position on taxes and perhaps tariffs. He has even intimated that his policy statements are simply a negotiating stance— he is asking for a lot more up front than he ultimately expects to get.
Having said this, what he is asking for is fiscally unsound. His tax and spending proposals will result in very large deficits and a much higher debt load. A future Congress may be able to rein in this profligacy, but it will not be easy, as there is a gulf between what he says he wants on taxes and spending and what it will take to make the budget arithmetic work.
He is also very suspicious of globalization. His willingness to threaten higher tariffs on U.S. trading partners and his sharp criticism of major trade deals signal a reversal on the long-running expansion of U.S. trade and foreign investment. Requiring millions of undocumented immigrants to leave the country also signals less openness to the rest of the world.
The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the U.S. economy will be more isolated and diminished.
I've left Scenario 2 for you to read on your own. I haven't even read it yet.
Moody's Analytics examination of Mrs. Clinton's policies has yet to be released. When it is, I'll do the same thing with it....
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