Tag Archives: regulatory reform

Can We Trust Donald Trump to Do What’s Best for America?

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From a reader of my blog:

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
the USA.
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.capture97
  • 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.

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What Will Trump Do?

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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.”

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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.

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Trump Could Become a Transformational President

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According to the historian John Steele Gordon, “Trump May Herald a New Political Order,” there have been just four transformational presidencies so far in U.S. history:

  • Andrew Jackson in 1828 moved the locus of political power sharply down the socioeconomic scale.

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  • Abraham Lincoln in 1860 preserved the Union, freed the slaves and turned the South into essentially a third world country for the next 100 years.
  • William McKinley in 1896 ushered in an era of almost unbroken Republican dominance which lasted until the 1930s.
  • Franklin Roosevelt in 1932 who overcame the Great Depression and greatly expanded the reach and power of the federal government.

Ronald Reagan in 1980, constrained by a solidly Democratic House, was less transformational than the four presidents above, even though he ushered in the era of Great Moderation which lasted until the Great Recession hit in 2007-2008.
Barack Obama in 2008 took office with strong Democratic majorities.  However the last eight years have proved a disaster for the Democratic Party.  They lost the House in 2010, the Senate in 2014, and Republicans now control most governorships and state legislatures as well.
Now consider Donald Trump’s strong political position as he takes office:

  • The Republicans hold a big majority in the House and a small majority in the Senate. And ten Democratic Senators in states carried by Mr. Trump are up for re-election in 2018.
  • He was elected to change the self-serving ways of Washington and owes little to the political establishment.
  • His cabinet picks, many with excellent qualifications, signal profound changes in government policy, especially lower tax rates and a regulatory environment more friendly to business.

Conclusion. Mr. Trump has excellent prospects for achieving faster economic growth and therefore rising incomes for the blue-collar workers who provided his victory margin. If he can also improve life in the inner cities, as he has promised to do, he and the Republican Party will be unbeatable for many years to come.

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Can the Economy Grow Faster without Increasing Our Debt?

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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.

capture15But 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.

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What Trumponomics Will Look Like (Hopefully!)

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Donald Trump won the presidential election because of his strong support from blue-collar workers who feel aggrieved by the U.S. economic system. Many have lost their jobs in recent years due to technology and globalization.  Many others have suffered wage stagnation.  Helping this large group of voters is surely Mr. Trump’s primary mandate from the election.

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The best way to do this is to make the economy grow faster by implementing smart policies such as:

  • Corporate tax reform. Reducing the top rate from 35% to about 20% will make the U.S. competitive with other developed countries and induce American multinational companies to bring their overseas profits back home for reinvestment. This will create more jobs and better paying jobs. This can be paid for by eliminating various deductions.
  • Business tax reform. Allow full expensing of capital investments, paid for by eliminating the deductibility of interest payments. This will strongly encourage more business investment and therefore increase worker productivity.
  • Individual tax reform. Lower marginal tax rates across the board by 10%, paid for by eliminating most deductions. This would give an automatic increase in pay to the two-thirds of taxpayers who do not itemize deductions and, since most of the pay increase would be spent, grow the economy by stimulating demand.
  • Regulatory reform. Much can be done to alleviate the regulatory burden on business, see here and here.
  • International trade rules. “Tearing up NAFTA” would be a huge mistake because the U.S. exports $600 billion annually to Canada and Mexico with a trade deficit of only $40 billion. But NAFTA can be updated with side agreements to address concerns of fairness. Expand retraining programs for workers who lose their jobs to foreign competition.
  • Immigration reform. Secure our southern border and deport the illegal immigrants who are lawbreakers as Mr. Trump wants to do. Then give guest worker visas to law-abiding employees of legitimate businesses and use eVerify to enforce them.

Conclusion. Changes such as these will give a big boost to the economy and therefore create many new jobs and better paying jobs.

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The Need for Regulatory Reform

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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.

capture74Two 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.

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How to Get Our Economy Back On Track

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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.

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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).

    capture72Such 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.

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The Source of Economic Growth

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In my last post, “What the Republican presidential candidates should be saying,”  I summarized the argument by the economist, John Cochrane, that “sclerotic growth is the economic issue of our time.” Mr Cochrane shows dramatically that even small differences in the growth rate over time can make a huge difference in raising living standards.
Capture0He goes on to say that

  • 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.

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The Republicans Need to Get Real about Tax Reform

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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.
CaptureThe 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.

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