What is ‘Trumponomics’?
Trumponomics describes the economic policies of U.S. President Donald Trump, who won the November 8, 2016 presidential election on the back of bold economic promises to cut personal and corporate taxes, restructure trade deals and introduce large fiscal stimulus measures focused on infrastructure and defense.
Trump was not always clear and consistent about his policies, and when he was, they were often unorthodox enough to have unpredictable consequences. This resulting uncertainty helps explain the market reaction to his win in the early morning of November 9: Dow Jones Industrial Average futures plunged to a low 867 points below their previous close, and trading in S&P 500 and Nasdaq futures fell fast enough to trip circuit breakers. The Mexican peso, which had become a proxy for Trump’s chances of success, went into free-fall. Treasury yields dropped by nearly 18 basis points as investors piled into the safe haven.
Then a funny thing happened. Except in the case of the peso, which continued to slump against the dollar, these initial reactions reversed themselves. Treasury yields stopped falling and promptly gained around 24 basis points as bearishness on government bonds took over. The Dow closed up nearly 257 points (futures closed up 305, for a 1,172-point reversal). The next day the index closed at a record 18,807.88. The following three sessions also saw record closes, and at the open on January 25, the Dow broke 20,000 for the first time.
Trump rewrote his tax plan twice. He had it both ways when it came to the Fed’s low interest rate policy. A lack of consistency, coupled with an oratorical style that often leaves room for multiple interpretations, has made putting numbers on Trumponomics challenging.
Yet on a few points, Trump was perfectly clear: he wanted to put curbs on immigration and trade, lower taxes on individuals and businesses, and increase spending on infrastructure projects. Using these and other tangible promises, economists hazarded guesses during the campaign about the effect Trump is likely to have on economic growth, the labor market and the national debt. Unsurprisingly, these predictions vary widely.
During the third televised debate, Trump said of gross domestic product (GDP) growth, “we’re bringing it from 1% up to 4%, and I actually think we can go higher than 4%. I think you can go to 5% or 6%.” Treasury Secretary Steve Mnuchin is less gung-ho, telling Congress on February 23 and Fox News three days later that the administration’s target is 3% or higher.
A few months earlier, in June, a team led by Moody’s chief economist Mark Zandi had forecast that, if Trump were to implement his policies “at face value,” real GDP would expand by about 0.6% annually from 2016 to 2020. That rate is considerably slower than Moody’s baseline estimate of 2.3%. Assuming Trump has to backtrack on some of his policies due to a hostile Congress, Moody’s projects 0.4% annual growth.
The Tax Foundation is more sanguine about Trumponomics’ prospects. The right-leaning think tank projected in September that his policies would increase GDP by 6.9% to 8.2% over the long term (they did not give an exact time frame), in addition to the 19.2% baseline growth the Congressional Budget Office (CBO) forecast in August for 2016-2025.
The OECD is also optimistic. In its November economic outlook, it projected that Trump’s fiscal stimulus will boost U.S. GDP growth in 2017 by 0.4 percentage points (ppt) from its baseline estimate, to 2.3%. In 2018 growth is projected to receive a 0.8 ppt bump to 3.0%. The OECD expects this added growth to spill over into other economies, pushing global GDP growth up by 0.1 ppt to 3.3% in 2017 and by 0.3 ppt to 3.6% the following year. The forecasts assume, however, that Trump’s rhetoric on trade does not result in protectionist policies (see “Trade” below).
The Peterson Institute for International Economics (PIIE) wrote in September that it expects Trump’s policies, if implemented, to set off “a trade war that would plunge the US economy into recession and cost more than 4 million private sector American jobs.”
Moody’s is only slightly less pessimistic: Zandi’s team wrote that Trump’s policies would result in 3.5 million fewer jobs after four years, with unemployment rising to perhaps 7% from its current level of 4.9%.
The OECD, on the other hand, projected in November that the unemployment rate would fall by just under 1/2 ppt by 2018, owing to Trump’s proposed fiscal stimulus. Those projections come with an important caveat, however (see next section).
It may come as a surprise, then, that the OECD projected in November that real growth in global trade would accelerate by 1/4 ppt to 2.9% in 2017 and by 1/2 ppt to 3.2% in 2018, as a result of Trump’s policies. Canada and Mexico, the think tank wrote, would reap particular benefits. In light of Trump’s rhetoric on trade, however – and especially trade with Mexico – those forecasts come with a crucial caveat: “worsening protectionism and the threat of trade retaliation could offset much of the fiscal initiatives’ impact on domestic and global growth, leaving countries with a poorer fiscal position as well.”
Inflation and Interest Rates
The OECD forecast in November that fiscal policy stimulus would add 0.1 ppt to inflation in 2017 and 0.4 ppt in 2018, causing consumer price inflation to rise to around 2-1/2% by the end of that year. According to the Bureau of Labor Statistics, the consumer price index (CPI) rose 1.6% in the twelve months to October.
The OECD expects rising inflation to impact monetary policy, with the upper bound of the federal funds rate’s target range rising to 2% from its January 2017 level of 0.75%. Trump’s expected fiscal stimulus accounts for 1 ppt of this projected increase.
The Trump administration released the broad outline of a tax reform proposal in April, but the lack of detail has made it difficult for experts to estimate potential changes to after-tax earnings. The following is based on plans released during the campaign.
The Tax Foundation wrote in September that it expects Trump’s plan to increase after-tax earnings in every income quintile, though the effect will be significantly larger at the top of the scale: the bottom 20% will see their after-tax incomes rise by 1.2% (or by up to 8.1%, taking growth forecasts and other factors into account), while the top 20% will see theirs grow by at least 4.4% and by up to 12.3%. The top 1%, meanwhile, will see their after-tax incomes rise by at least 10.2% and by as much as 19.9%.
The Tax Policy Center reached similar conclusions in October: each income quintile would see its after-tax earnings rise under Trump’s plan, with the benefits concentrated at the top. Households making over $3.7 million in 2016 dollars, the top 0.1% of the population, would see their tax bills fall by $1.1 million in 2017, or 14% of after-tax income; the poorest fifth of households would get a 0.8% tax break, worth $110. The overall average tax cut would be 4.1%, or $2,940.
The Tax Policy Center found that taxes would rise for many single-parent and large families, however, due to Trump’s plan to repeal personal exemptions and the head of household filing status (see “Taxes” under Economic Policies below). Lily Batchelder, a visiting fellow at the think tank and ex-deputy director of Obama’s National Economic Council, wrote in October that around 8.7 million households – including 51% of all households run by single parents – would see their taxes rise under Trump’s plan.
The Tax Foundation estimated in September that Trump’s plan will lower federal tax revenues by $4.4-$5.9 trillion over the next decade on a static basis. Incorporating the boost to GDP growth the think tank forecasts, federal tax revenue may decrease by $2.6-$3.9 trillion.
The fiscally hawkish Committee for a Responsible Federal Budget forecast in September that Trump’s policies would decrease revenue by $5.8 trillion over ten years; the public’s share of federal debt – at that time $14.3 trillion or 77% of GDP – would rise to over 105% of GDP over the same period, compared to a baseline forecast of 86%.
As of January 26, the total national debt is just short of $20.0 trillion, or 107% of annualized third-quarter 2016 GDP.
The Tax Policy Center estimated in October that Trump’s tax plans would reduce federal revenues by $6.2 trillion over the first decade and an additional $8.9 trillion in the second decade. The think tank collaborated with the Penn Wharton Budget Model to produce two sets of estimates that take into account the macroeconomic effects of Trump’s plan. Both estimates forecast a short-term boost to GDP growth, which would offset the costs of Trump’s plan for five to eight years; one sees GDP lagging behind the baseline estimate beginning in 2024. Neither accounts for promised but unspecified spending cuts. When rising interest payments are factored in, the federal debt rises by $20.7-$22.1 trillion (49.9% to 55.5% of GDP) over 20 years. In other words, it more than doubles.
Trump entered the White House flanked by Republican majorities in both houses of Congress, but his prior clashes with Republican leaders, particularly with House Speaker Paul Ryan, suggest that he may have trouble passing his entire legislative agenda. Democrats, meanwhile, may act to block some of Trump’s proposals, despite their Congressional disadvantage. What the following policies will look like when – and if – they become law is difficult to say, but here are the positions Trump has espoused during his campaign and the executive actions he’s taken as of January 30.
U.S. trade policy, and the manufacturing jobs Trump blames it for shipping overseas, were at the center of the president’s platform. On his campaign site Trump promised to “negotiate fair trade deals that create American jobs, increase American wages, and reduce America’s trade deficit.”
Mexico and NAFTA
Mexico has come in for particular criticism; Trump repeatedly threatened to slap 35% tariffs on cars imported from Mexico, beginning the day he announced his candidacy in June 2015. At $74 billion, vehicles were the largest category of imports from Mexico in 2015, according to the U.S. Trade Representative’s website.
Trump has also singled out the North American Free Trade Agreement (NAFTA), which he called the “single worst trade deal ever approved in this country” during the first presidential debate in September. The deal, which Bill Clinton signed in 1993, reduced trade barriers among Mexico, the U.S. and Canada. Between 1993 and 2015, the nominal value of goods imported from Mexico rose 643% to $296.4 billion, according to the Census Bureau; adjusted for inflation using the CPI, the increase was 353%. The U.S. had a $67.5 billion trade deficit with Mexico in goods in 2015, but a $9.6 billion surplus in services.
Trump is expected to call for NAFTA to be renegotiated or to withdraw from it altogether; he appears to have authority to pull out of the agreement by giving six months’ notice, according to article 2205 of the treaty. Some experts believe he would need Congress’ support, however.
The New York Times reported on January 26 that Trump plans to charge a 20% tax on Mexican imports in order to fund the construction of a border wall, which he had ordered the previous day.
The Trans-Pacific Partnership (TPP), a trade agreement that the U.S. signed but did not come up for a ratification vote in Congress, would have reduced trade barriers among 12 Pacific Rim nations. The pact’s prospects were already dim before Trump’s election made it a dead letter. On January 23, in a mostly symbolic move, he ordered the U.S. to withdraw from the deal.
The TPP, which excluded China, formed the economic leg of the Obama administration’s “rebalance to Asia,” which Hillary Clinton spearheaded as secretary of state. Her Democratic primary opponent, Senator Bernie Sanders of Vermont, and Trump repeatedly attacked Clinton for backing the deal, leading her to retract support for it. China has stepped into the vacuum with an alternative 16-country trade pact, called the Regional Comprehensive Economic Partnership.
The president has also criticized China, claiming that it suppresses the value of its currency, the yuan, in order to gain an export advantage. While China maintained a dollar peg that held the yuan’s value down from 2008 to 2010, the evidence now suggests the government is intervening to lift, rather than lower, the yuan’s value. The country’s foreign currency reserves fell from nearly $4 trillion in March 2014 to just over $3.1 trillion in October. Even so, Trump promises to declare China a currency manipulator and impose tariffs of up to 45% on its exports.
Trump announced the formation of a new White House National Trade Council on December 21, naming a vocally anti-China economist, Peter Navarro, to head it. Among other books, Navarro has authored “Death By China: Confronting the Dragon – A Global Call to Action” and “The Coming China Wars: Where They Will Be Fought and How They Could Be Won.”