Trumponomics

Empty Economic Promises

Republican presidential candidate Donald Trump speaks during a campaign rally at Crown Arena, Tuesday, Aug. 9, 2016, in Fayetteville, N.C. (AP Photo/Evan Vucci)
Earlier this week, Republican presidential candidate Donald Trump unveiled his economic plan.
  • Why it matters

    Why it matters

    • U.S. presidential candidate Donald Trump’s new plan cobbles together some of the most popular economic ideas from other politicians, like Ronald Reagan and Bernie Sanders. But in real economic terms, he’s making empty promises.
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  • Facts

    Facts

    • The potential for economic growth in the U.S. has waned. Last year’s growth rate was only 1.2 percent.
    • Mr. Trump wants to fuel growth by doing things like cutting corporate tax from 35 to 15 percent. But it is hard to know where the funds to cover the shortfall would come from.
    • Mr. Trump also wants to renegotiate key international trade agreements. The economic advantages of agreements are often overestimated but the kind of protectionism Mr. Trump is suggesting could be dangerous.
  • Audio

    Audio

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Where can we find a candidate for the U.S. presidency who combines the vote-inspiring ideologies of Ronald Reagan and Bernie Sanders?

After all, Mr. Reagan’s administration favored an almost libertarian approach to the economy – this has gone down in history as Reaganomics. And avowed socialist and Democrat Mr. Sanders is a vociferous opponent of free trade and globalization.

Now with his own solution – catchphrase: Americanization, not globalization – this year’s Republican presidential candidate, Donald Trump, thinks he has found the magic formula that combines the two.

His economic ideology is a balancing act between “tax cuts and deregulation for all” and the sort of battle cry against free trade that Mr. Sanders was making. The latter is Mr. Trump’s way of converting the furious economic frustration of Americans who’ve been left behind by globalization into votes.

Mr. Trump’s economic program is a concession to the Republican party establishment, with which he has repeatedly clashed in recent weeks.  But it is also a signal to his supporters from the white, working- and middle-class supporters who are opposed to that establishment.  So Mr. Trump the populist is now doing what all populists do and promising everything to everyone. However, there is no way he can paper over the contradictions in his economic program.

Like Ronald Reagan, Mr. Trump is relying on an economic theory called the “Laffer curve,” which claims there is an inverse relationship between taxation levels and tax revenues. But in practice, this hasn't worked out.

The Republican promises he will restore the American economy to greatness. “Make America grow again,” as he put it.

It is true that the potential for economic growth in the U.S. has waned, as it has in all industrial countries and emerging markets since the financial crisis of 2008. Last year’s growth rate was only 1.2 percent and Americans are accustomed to growth rates of 3 percent or more. And it is also true that tax cuts and less regulation could trigger growth, especially in smaller companies.

But Mr. Trump contradicts his growth program with his attacks on free trade. He wants not only to renegotiate the NAFTA agreement with Mexico and Canada, but also the TPP agreement recently concluded with 11 other Pacific states. He is even risking a trade war with China, one of the U.S.’s biggest trading partners, by threatening Beijing with punitive tariffs of up to 45 percent.

It is true that the economic advantages of free trade agreements are often overestimated. But past experience shows clearly that protectionism of the sort Trump advocates can cause severe economic damage. The right answer to the negative effects of free trade is not isolation but more assistance, and, above all, more targeted assistance to enable those affected to adapt. Up until now, Mr. Trump has been far too reticent about this.

His tax proposals have not been very well thought through either. Cutting corporate tax from 35 to 15 percent sounds good for U.S. companies at first glance. And the idea of tax breaks for everyone is an election campaign hit, even if Mr. Trump’s promises on tax don’t sound quite as generous now as they did a few weeks ago. But the Achilles heel of his tax program is how he will finance it. He has announced that he will close numerous tax loopholes for the rich. But apart from abolishing tax breaks for hedge funds and private equity companies, he hasn’t come up with much else.

In any case, that alone will not be enough to close the huge holes in the U.S. budget which would undoubtedly result from his tax promises. Experts have already predicted a revenue shortfall of up to $10 trillion spread over 10 years.  That Mr. Trump could compensate for this gap with additional economic growth is hardly likely.

Ronald Reagan, whom Mr. Trump now invokes with his tax plans, also produced enormous budget deficits with his tax cuts in the 1980s, because he was relying on the effect of the so-called “Laffer curve.” U.S. economist Arthur Laffer claimed there was an inverse relationship between the level of taxation and tax revenues. But this only exists in theory. In practice it has usually not worked out that way.

The economy is traditionally seen as a strong issue for Republicans and a weak one for the Democrats. And many Americans are unhappy with stagnating incomes. So, after all of his gaffes, this issue would have been a good opportunity for Mr. Trump to score points with voters. However he barely made use of it and it is hardly going to have a major impact on his standing in the polls.

However “Trumponomics” could certainly have a lasting impact on the Republicans. The political party must now come to terms with the fact that it can’t even convince the majority of its own supporters to agree with the party’s liberal economics.

 

To contact the author: riecke@handelsblatt.com

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