MAGAnomics: A 500 Day Appraisal

This article appeared on EconLog on July 19, 2018.
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A few weeks ago, the Trump administration surpassed its 500th day in office. Over that time, the President and his staff have been able to develop and refine their “Make America Great Again” economic agenda, pursue long-term policy goals, and to demonstrate both their commitment and ability to achieve those goals. Thus, we now have a good vantage point to survey and appraise President Trump’s “MAGAnomics.”

And at this moment, MAGAnomics appears to be highly successful. The unemployment rate hovers around record-low levelsmore workers are entering the labor forcegross domestic product has grown at a solid 3% annual rate for three of the last four quarters, and consumer confidence is at levels not seen since the end of the late-1990s economic boom. Those are fine numbers for an administration in its 18thmonth in office.

The question is, will MAGAnomics help these good times continue long-term? To answer that, let’s look more carefully at the Trump economic agenda.

Fiscal Policy

Arguably, the Trump administration’s greatest policy triumph so far is the fall 2017 tax legislation that lowered income tax rates on businesses and individuals, increased the standard deduction and family tax credit, capped a number of tax deductions used by wealthier households, and ended the special tax on individuals who lack health care coverage compliant with the 2010 Affordable Care Act. The overall result is a significant lowering of Americans’ current tax burden and, accordingly, government revenue.

The lower business tax rate and the capped tax deductions are noteworthy achievements. The former reduces the deadweight loss on desirable business activity and brings the United States in line with business tax rates in the rest of the developed world. The latter reduce the regressivity of some provisions of the U.S. tax code. Importantly, those changes will likely prove enduring. Before the 2017 legislation, there seemed to be a consensus in Washington that U.S. business tax rates should be cut and regressive tax breaks curtailed, but there wasn’t enough political will to accomplish those goals. Now that the changes have been made and the political capital spent, it seems unlikely that some future Congress will reinstitute a tax disadvantage on U.S. businesses or restore these particular tax advantages to a small minority of wealthy households.

However, the overall reduction of Americans’ taxes will almost certainly not endure because federal spending was not cut along with the tax changes. What spending cuts the Trump administration did propose were tiny, and Congress didn’t adopt them anyway (which the White House probably expected). Instead, Trump and Congress will close the budget gap with more federal borrowing.

The administration expects federal spending will hover around 20.5 of U.S. GDP throughout the Trump presidency, yielding trillion-dollar annual deficits. And no, the tax cuts, taken together, will not “pay for themselves,” nor will they induce spending cuts or smaller government in the future. Instead, Trump’s borrow-and-spend fiscal policy will allow current voters to avoid the all-important question of whether the government benefits they receive are worth the cost.

But sooner or later those debts will come due. Unless Congress launches into some serious budget-cutting, federal taxes will have to rise to cover the bond payments, or at least rise enough to satisfy prospective bond-buyers that the U.S. government will continue covering its obligations. So new taxes and higher tax rates, along with increased deadweight losses and other unintended consequences, lie ahead because of MAGAnomics.

Trade and Immigration

Given its public comments and policy-making activity, it’s clear the Trump administration’s top two policy priorities are to increase government control over the nation’s international trade and decrease immigration, both illegal and legal.

On trade, the administration has backed out of the Trans-Pacific Partnership, a pact to lower trade barriers between nations around the Pacific Rim, and is threatening to abandon similar pacts with Europe and the rest of North America. The administration has also implemented tariffs on imported goods as varied as steel and aluminum, household appliances, and solar panels, and is threatening them on foreign automobiles. It has also singled out specific nations for additional tariffs, with China as its chief target. In response, China, Canada, and the European Union are formulating (and beginning to enact) reciprocal tariffs against U.S. goods.

Econlog contributors have written much here and elsewhere (see these two articles that Pierre Lemieux wrote for Regulation) about protectionism’s self-inflicted harm and the virtues of trade. President Trump says his tariffs will force trading partners to open their markets to more U.S. goods, thereby moving the world toward freer trade (so long as there are no persistent bilateral trade deficits). He even claims that, as a result of the actions, “Every country is calling every day, saying, ‘Let’s make a deal, let’s make a deal,’” for improved trade relationships. However, his administration has yet to announce any such deals, nor do foreign nations seem particularly concerned with negotiating. Instead, the United States appears to be moving toward a sort of reverse–Galt’s Gulch where we withdraw from international trade while the rest of the world continues to lower their protectionist barriers and grow richer as a result.

Concerning immigration, one of the foundational planks of the Trump presidency (perhaps the foundational plank) is that both legal and illegal immigration threaten national security and increase Americans’ risk from violent and property crime. Many MAGA supporters also claim that cutting immigration will raise low-skilled U.S. workers’ wages by reducing the supply of labor.

But empirical evidence contradicts Trump’s national security and crime claims; immigrants (both legal and illegal) appear to have lower propensity to commit violent and property crimes than native citizens, and the nation’s immigration vetting procedures—tightened after 9/11—have proven highly effective at screening out dangerous persons.

Concerns about immigration’s effects on wages for low-skilled labor have some empirical support; however, immigration also appears to increase native-born workers’ wages overall, in part because immigrants help improve productivity. Besides, the American economy benefits from immigrants’ greater entrepreneurial activity as compared to native workers, and their greater likelihood to be employed.

The empirical evidence indicates that President Trump’s trade policies are harmful and his immigration policies dampen the nation’s economic vigor. In these areas, MAGAnomics is a complete failure.

Regulation

At first blush, regulatory policy seems to be a MAGAnomics success. Following President Trump’s taking office, the Republican-led Congress made unprecedented use of the 1996 Congressional Review Act to repeal more than a dozen regulations of questionable value that the Barack Obama administration implemented in its final months in office. Trump appointees in the federal agencies also put the brakes on ongoing rulemaking, killing a slew of Obama initiatives. This has yielded a historic freeze in the growth of federal regulation and even a slight decline in the aggregate cost of regulatory compliance.

But the U.S. economy doesn’t just need a halt to new regulations, but a rollback and simplification of whole regulatory regimes that now harm public welfare. This happened in the great deregulatory wave of the 1970s–1990s under both Republican and Democratic presidencies and Republican and Democratic Congresses. That removal of regulatory obstacles resulted in cellphones in nearly everyone’s pocket, cheaper and commonplace air travel, a wider array of products at lower real prices, and wider and more diverse mass media programming, among many other benefits.

Unfortunately, the Trump administration isn’t laying the difficult intellectual groundwork and building the political coalitions necessary for another wave of enduring deregulation. Neomi Rao, the administration’s head of the Office of Information and Regulatory Affairs and the would-be leader of such a push, has the necessary talent and expertise, but she isn’t getting much help from the White House. As a result, MAGAnomics will likely have no long-term regulatory achievements and its short-term actions will not last much longer than Republican control over the White House and Capitol Hill.

Long-term Challenges

The current federal debt is over $21 trillion, roughly 105 percent of GDP. But that is only a portion of the financial liability faced by U.S. taxpayers. If the Social Securityand Medicare programs are to continue delivering their current level of benefits for the next 75 years (basically, the lifespan of today’s children), they will respectively have to increase their revenues $13.2 trillion and $37.2 trillion, respectively, over their currently anticipated tax receipts.

Rather than addressing those grave financial problems, Trump has repeatedly vowed to make no changes to Social Security or Medicare benefits. That saddles the U.S. economy with enormous uncertainty—not to mention compels Americans to continue paying into public retirement programs that are high-cost, low-benefit, high-risk, and miserably inflexible. Refusing to address this enormous fiscal overhang is another MAGAnomics failure.

Conclusion

No other Trump economic initiatives come to mind besides those few listed above. MAGAnomics appears to be little more than an impulsive dislike of free trade and immigration, a hazy desire for less regulation, disinterest in (or perhaps a lack courage to face) the nation’s long-term fiscal problems, and a desire to temporarily lower taxes without making the hard choices necessary to fiscally balance those cuts and make them enduring. In other words, MAGAnomics is a slogan supporting a few weak and harmful initiatives, not a serious collection of policies thoughtfully designed to strengthen the nation’s economic health.

But perhaps I’m too pessimistic. The Trump administration may ultimately succeed in strong-arming other industrial nations to agree to lower trade barriers. The president and his congressional allies may adopt—and follow through on—major spending cuts. A wellspring of new federal revenue may appear. President Trump’s economic policies may be vindicated.

But it seems far more likely MAGAnomics will join the Federal Reserve’s late-1920s gold policy and the early-1970s Wage and Price Controls as one of the biggest policy flubs in U.S. economic history.