You are an eternal optimist. Have you factored in these possibilities:
1. Paul Ryan and others will support the Wall and what it costs.
2. Immigration control will limit much needed manpower.
3. Trade wars with Mexico and other countries might severely reduce the output of
4.Tax reform will favor the ultra-wealthy, thus not do much to stimulate the
economy, causing a dramatic increase in the debt.
5. Defense spending will be massive, thus up with the debt.
6. Charter schools will lack sufficient oversight, thus poor results will follow.
You seem to convey that Trump will execute a strategy much as you think it should be done. I doubt it.
The above outcomes are unlikely for the following reasons:
Trump obviously likes being President, will continue to do so, and will hope to be re-elected in 2020. His re-election prospects will depend almost entirely on his boosting economic growth in order to increase the wages of his key blue-collar supporters.
The quickest way to speed up growth is through corporate and business tax reform and deregulation. Trump’s entire team of advisors and cabinet secretaries, as well as congressional majorities, agree on this strategy. These things are likely to get done, sooner rather than later.
A trade war with Mexico or any other major trading partner (China, Canada, etc.) will badly hurt the economy. Trump knows this as well as anyone and won’t let it happen. A 20% tariff on Mexican imports to pay for a wall will just transfer the cost to American consumers and will be very unpopular. Trump’s people can figure this out.
Having 11½ million illegal immigrants in the U.S. is a significant problem and Trump has a mandate to fix it. His plan is to 1) build a wall, 2) deport the 800,000 or so lawbreakers amongst these illegals, and then 3) figure out what to do with the rest. This sounds to me like a reasonable plan and has a good chance of being successfully implemented.Conclusion. I admit to being an optimist. It keeps me going! I’ll respond to the other specifics (debt, charter schools, etc.) in the near future.
I did not vote for Donald Trump because of his often crude remarks and sleazy behavior. But I am now cautiously optimistic about the prospects for his presidency based on the quality of his nominees for important government posts. Like many of his voters, I “take him seriously but not literally.”
Here is what I think he will do:
Economic Policy. He will try to speed up economic growth, well above the average 2.1% annual GDP growth of the past 7½ years. This can be accomplished with tax reform (lowering tax rates paid for by shrinking deductions), regulatory reform (including paring back Dodd-Frank and the ACA), immigration reform and tougher trade policies. Faster growth benefits the whole country and especially the blue-collar workers who voted for him.
Improving life in the inner cities. K-12 education is a disaster in many inner cities and Betsy DeVos will be a reformer in the Education Department. Ben Carson grew up in public housing and is an excellent choice for HUD.
Foreign Policy. Mr. Trump wants changes from China on currency and trade practices. He also wants more cooperation from Russia in fighting terrorism. He wants our NATO partners to bear a bigger share of their own defense. His Secretary of State designee, Rex Tillerson, supports arming Ukraine against Russia and also supports the TPP trade agreement with Asia. This all sounds good to me.
Fiscal Policy. My biggest concern at this point is our national debt, now 76% of GDP (for the public part on which we pay interest) which is historically high and steadily getting worse. The House Republicans are serious about shrinking deficit spending and hopefully Mr. Trump will support their efforts.
Conclusion. Donald Trump has a highly unconventional (but very effective) style of communication. If it leads to progress in addressing our biggest problems as above, then he’ll have a very successful presidency.
As I have been saying over and over on this blog for several years, America’s two major fiscal and economic problems are:
Slow Economic Growth, averaging just 2% since the end of the Great Recession in June 2009.
Massive Debt. Our public debt, on which we pay interest, is now $14 trillion or 76% of GDP, the highest it has been since the end of WWII.
President-elect Donald Trump campaigned on the issue of slow economic growth and will surely work with the Republican Congress to institute various tax and regulatory reform measures needed to speed up growth.
But during the campaign Mr. Trump also introduced a specific tax reform plan which would lead to an estimated $4.4 trillion in new debt over the next ten years. Such a very large amount of new debt is highly undesirable and hopefully will be rejected by Congress.
In fact, as described by the Tax Foundation, there are some very good ways to use tax reform to improve growth without increasing debt. Fox example:
Allowing the full and immediate expensing of capital investments will grow the economy by 5.4% at a cost of $881 billion over ten years.
Lowering the top corporate tax rate to 20% will grow the economy by 3.3% at a cost of $718 billion over ten years.
Eliminating all itemized deductions except the charitable and mortgage interest deductions will slow economic growth by only .4% and increase tax revenue by $2,268 billion over ten years.
Conclusion. Just these three specific tax reform measures would grow the economy by about 8% while producing $600 billion in new tax revenue over a ten year period. There are other ways as well of achieving similar growth and revenue levels. The point is that the changes our country needs can be accomplished without increasing the national debt and perhaps even reducing it instead.
As many commentators, including myself, have pointed out, we need faster economic growth in order to create more and better paying jobs and also to bring in more tax revenue to shrink our huge budget deficits.
The rate of economic growth equals the growth of labor productivity plus the growth of employment. The problem is that both productivity growth and the labor force participation rate have dropped steeply in recent years.
As I have pointed out in previous posts, the U.S. economy has become less entrepreneurial in recent years in the sense that there are now more firms going out of business than new firms going into business.
An article in yesterday’s Wall Street Journal has another way of looking at this. The rate of startup formation has been declining in the U.S. for decades (as shown just below). It is obvious that figuring out how to boost entrepreneurship would do a lot to spur economic growth.
This can be accomplished with:
General growth measures. Tax reform (lower marginal rates paid for by shrinking deductions), regulatory reform and simplification, maximum free trade to open markets, immigration reform to bring in more skilled workers, entitlement reforms to prevent a debt explosion.
Business tax incentives. Immediate write-off (i.e. expensing) of business investment. This encourages more investment by eliminating the need for depreciation over an arbitrary number of years. It is paid for by eliminating the deduction for interest expense to finance such investment.
Conclusion. Lots of voices are saying that technological innovation is slowing down and that only fiscal stimulus by the government can speed up growth. Such pessimistic views will predominate unless the private sector is given the tools it needs to achieve growth in the most productive way.
One of my favorite topics is the need for faster economic growth in order to create more jobs and better paying jobs and also to bring in more tax revenue to help shrink our rapidly accumulating national debt.
My last post discusses vivid evidence from the economist John Taylor that slow productivity growth is one of the main culprits holding back our economy. He suggests several ways of speeding up productivity growth, one of which is regulatory reform.
Two previous posts, here and here, show the increasing size of the regulatory burden as well as how it could be eased significantly for main street banks, for example, by simplifying the Dodd-Frank Act.
A recent study from the Mercatus Center at George Mason University gives a good overall summary of the economic costs of excessive regulation. In particular:
Deterring growth. By distorting the investment choices that lead to innovation, regulation has caused a considerable drag on the economy, amounting to an average reduction of 0.8% in the annual growth rate of the US GDP. This has resulted in an economy which is $4 trillion smaller in 2012 than it could have been without such regulatory accumulation.
Increasing prices. Increases in the total volume of regulations are strongly associated with higher prices. This affects lower-income households harder than higher-income households.
Distortion of labor market. Regulation adds to costs, increasing prices for regulated goods and services and therefore reducing the amounts being bought and sold. As production declines, so does the demand for workers engaged in production. In addition, more regulation leads to a shift of workers from production to regulatory compliance, reducing overall economic efficiency.
Decline in competition. Existing firms benefit from regulation because it deters new market entrants, thereby reducing the number of small firms, which are responsible for most new hiring.
Conclusion. Federal regulations have accumulated over many decades, resulting in a system of duplicative, obsolete, conflicting and even contradictory rules. The consequences to the workers, consumers and job creators who drive economic growth and prosperity are considerable.
My last several posts have expressed dissatisfaction with both presidential candidates and the hope that whoever wins in November (very likely Hillary Clinton) will work with the Republican House of Representatives to implement its “A Better Way” plan for national renewal.
In particular, faster economic growth would produce more jobs and better paying jobs and hence is highly desirable. As many people, including myself, have pointed out, it is low productivity growth caused by low business investment, which is largely responsible for slow economic growth.
The economist John Taylor has an excellent analysis of this problem. He points out that the rate of economic growth equals the growth of labor productivity plus the growth of employment.
He then shows that:
Productivity growth slowed from the mid-1960s until the early 1980s, then increased until the mid-2000s, and has slowed way down in the past ten years.
The labor force participation rate has dropped dramatically since the Great Recession but only a small part of this drop off was caused by demographic trends (i.e. more retirees).
Such relatively long cycles of productivity growth and decline (longer than normal business cycles) suggests that government policy is having a major effect on economic performance. According to Mr. Taylor, what is needed is:
Tax reform to lower tax rates to improve incentives for work and investment.
Regulatory reform to prevent regulations which fail cost-benefit tests.
Free trade agreements to open markets.
Entitlement reforms to prevent a debt explosion.
Monetary reform to restore predictability in financial markets.
Conclusion. Mr. Taylor makes a very strong case that faster economic growth is not only possible but even achievable in the short run if our national leaders would just make some common sense policy changes.
I have written several posts recently, here and here, about the need for faster economic growth in the U.S. and how to achieve it. Part of the problem is the huge size of the federal bureaucracy and the enormous and rapidly growing number of rules which they issue each year. The magnitude of this problem is clearly shown in the above chart included in the latest annual report of the Competitive Enterprise Institute. According to the CEI:
Federal regulatory cost reached $1.885 trillion in 2015, which averages out to $15,000 per U.S. household for just one year. This exceeds the $1.82 trillion which the IRS is expected to collect in both individual and corporate income taxes in 2015.
In 2015, 114 laws were enacted by Congress while 3,410 rules were issued by agencies, 30 rules for each law enacted.
Some 60 federal departments, agencies and commissions have 3,297 regulations in development at various stages in the pipeline.
The 2015 Federal Register contains 80,260 pages, the third highest page count in history.
The George W. Bush administration averaged 62 major (having an economic impact exceeding $100 million) regulations annually, while the Obama administration has averaged 81 major regulations annually over seven years.
“Whenever one quarter of the Members of the U.S. House of Representatives or the U.S. Senate transmit to the President their written declaration of opposition to a proposed federal regulation, it shall require a majority vote of both the House and Senate to adopt that regulation.”
Another intriguing approach to attacking regulatory overkill is given by Charles Murray in his new book, “By the People, rebuilding liberty without permission.” The point is that there are measures which can be taken to address this particular aspect of our slow growth problem.
There is only one source of growth. Nothing other than productivity matters in the long run.
The vast expansion in regulation is the most obvious change in public policy accompanying America’s growth slowdown. Most recently under the Dodd-Frank Act and the Affordable Care Act, the financial and healthcare sectors of the economy have seen radical increases in regulatory intervention. But environmental, labor, product and energy regulation have all increased dramatically as well.
Regulation during the financial crisis did not fail for being absent. It failed for being ineffective.
The best way for the government to subsidize healthcare efficiently is to give straightforward vouchers which people can use to buy insurance or to fund health savings accounts. Such vouchers should replace Obamacare, Medicaid and Medicare.
The basic structure of growth-oriented tax reform is lower marginal rates, paid for by broadening the base by removing exemptions and loopholes. Several additional tax principles are:
The ideal corporate tax rate is zero. A high corporate tax rate hurts the workers more than anyone else.
A growth-oriented tax system taxes consumption, not income and savings.
Eliminating or moving away from taxing income, would lessen the value of personal deductions such as for mortgage interest or charitable donations.
The estate tax is a particularly distorting tax on saving and investment. The tax code should not give strong incentives to middle-age people to stop building their businesses or investing their money.
Solving our immigration problem would turn 11 million illegal immigrants into productive citizens. Guest worker and e-Verify enforcement are fixable problems.
How to speed up economic growth ought to be one of the basic issues in the presidential election campaign. Here are some good ways to do this.
The Republican presidential candidates have been releasing tax plans and they have been analyzed by the nonpartisan Tax Foundation. It turns out that most of these plans lose revenue over a ten-year period even on a so-called dynamic scoring basis where the stimulatory effects of the plan are taken into effect. Such callous disregard for the huge annual deficits we are now running, and our huge accumulated national debt, is totally unacceptable especially from the political party which bills itself as being fiscally responsible. The left-leaning New York Times points this out yesterday in its lead editorial, “Why the Republican Tax Plans Won’t Work.” According to the NYT:
Tax Revenues will need to increase by 40% over the next 10 years just to keep federal spending even with inflation and population growth.
Further additional revenues will be needed to pay for health care for the elderly, transportation systems, climate change and likely increased interest payments on the national debt.
Thus taxes will have to go up and can only be imposed realistically on the wealthy who have had the biggest income gains in recent years.
Democratic presidential candidates do propose tax cuts but only for low- and middle-income Americans.
Democrats are calling for new taxes on financial transactions.
Democrats also propose to raise wages, support higher minimum wages, support unions and expand profit-sharing and employee ownership.
This is the program the Democrats will be pushing if they win the presidency next year. It has some attractive features but the likely overall outcome will be increased deficit spending, a rapidly increasing debt and a continued stagnant economy.
Meaningful tax and regulatory reform will both be needed to get the economy growing faster than the 2% average of the past six years. Any credible tax reform program simply must be at least revenue neutral so that, combined with spending restraint, it will put our national debt on a downward path.