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The fatal flaws in Trump’s economic math

NEW YORK — President Donald Trump is betting much of his first term on a bold promise that tax cuts, revamped trade deals and deregulation will unleash the kind of sustained economic boom the United States hasn’t seen since the dot-com days of the late 1990s.

His big problem is focusing his domestic agenda around that premise: Even if he does manage to push big tax cuts through Congress, many economists argue that the administration’s predictions — for nearly a decade of at least 3 percent economic growth — are wildly optimistic and unlikely to materialize. And some of Trump’s tax moves, along with his “America first” trade and immigration policies, could backfire and constrict economic growth.

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Even many conservative economists argue that Trump’s plans could, at best, produce a brief burst of faster growth followed by a quick return to the reality of an economy slowed by an aging population and a lack of worker productivity growth.

“Trump’s plans alone are not going to get us to consistent 3 percent growth,” said Kent Smetters, a former George W. Bush administration official and professor at the University of Pennsylvania’s Wharton School. He estimates Trump’s initiatives could develop a burst of economic growth that lasts a couple of years, followed by a return to the recent trend of about 2 percent growth—and perhaps lower due to the federal debt load being built up.

That’s one of several fatal flaws in Trump’s plans: Relying on increased borrowing to boost the economy could actually slow economic growth over a 10-year period, by increasing the deficit and raising borrowing costs that hit both the federal government and average consumers.

The White House sees the world very differently.

In releasing its 2018 budget blueprint, the administration predicted its policies would create 3 percent growth by 2021 and keep that pace up for at least seven years.

The prediction, used by the White House in claiming it can balance the budget, is dramatically higher than those maintained by the CBO and leading private-sector economists who see growth hovering around 2 percent at best for the next decade.

OMB Director Mick Mulvaney lashed out at skeptics of the administration’s growth estimates while rolling out the budget last week.

“We have been attacked, stunningly, by some folks on the left and even in the mainstream who say that that’s an unreasonable assumption,” he said. “We should stop and think how absurd that is to think that 3 percent growth in an American economy is to some people an absurd assumption.”

The U.S. economy hasn’t grown at 3 percent or better for seven straight years in many decades. The Ronald Reagan-era boom of the 1980s saw just six years of that kind of growth, and that followed a recession. The Internet boom of the late 1990s produced just five years of growth at 3 percent or better.

And the U.S. economy is very different now than it was before those two booms. The country is in the eighth year of an economic expansion — rather than coming off a recession — and now faces a Federal Reserve hiking interest rates.

The Fed has made clear that if Congress and the White House pump fiscal stimulus into the current economy through tax cuts alone, it could respond with faster rate hikes to ward off inflation. That would in turn take much of the juice out of any tax plan that clears Congress.

Copies of the President's budget are displayed at a photo op in the Senate Budget Committee room on May 23, 2017. John Shinkle/POLITICO

And unlike before other big growth expansions, the labor market appears largely tapped out with joblessness at just 4.4 percent in April and productivity growth stalled. Productivity is up around 1 percent on an annual basis. Analysts argue it would have to improve dramatically to produce consistent economic growth of 3 percent or more.

No major advances are clearly on the horizon to jack up productivity in the short term. Big gains in productivity can result from government investments in research, technology and education. The Trump budget moves in the opposite direction, slashing spending almost everywhere but on the military.

“Increasing productivity depends at least in my mind on a number of those programs in non-defense including education, science and technology that they would cut,” said William Hoagland, a former GOP budget aide now at the Bipartisan Policy Center. “Tax cuts might give you some short-term growth but that is more than offset by reducing the seed corn of the future that could otherwise significantly increase productivity growth.”

Meanwhile, it’s not clear the administration and GOP Congress will settle on a tax reform proposal that some experts say might have the best chance of boosting growth.

Tax cuts on individuals are not expected to produce significant new growth like they did in the 1980s when Congress and the White House slashed rates that were as high as 70 percent, a level seen as discouraging additional earning.

So new growth would likely come from overhauling the corporate side of the tax code. And the White House now appears cool to two ideas embraced by many conservative economists and House Republicans as most friendly to growth: a border-adjustment tax that would allow lower overall corporate rates but broaden the tax base, and the immediate expensing of capital investments.

President Donald Trump is pictured. | Getty Images

The border tax has many critics who argue it would drive up costs for consumers and import-reliant businesses in the short run, though an increase in the value of the dollar is supposed to offset those impacts.

There is more widespread agreement on the amount of investment that could be spurred by allowing immediate expensing. But to do that, tax reform would also likely have to eliminate the deduction for interest expense on debt cherished by industries that rely on borrowing, including real estate and private equity — two groups well represented in the Trump administration.

Disputes over the border tax and eliminating the interest deduction have some conservatives worried that any tax package that can ultimately pass Congress with just Republican votes will simply be a reduction in rates that could add to the deficit and therefore have to expire in order to comply with congressional rules.

“Suppose you get a couple years of a corporate and individual rate reduction that is not permanent. I don’t think you’d get much growth out of that at all,” said Douglas Holtz-Eakin of the conservative think tank American Action Forum. “And I’m deeply concerned that it would actually backfire and global companies would say, ‘You guys have had years to figure this out and do it right and you haven’t done it, so we’re leaving.’”

House Ways and Means Chairman Kevin Brady, a key figure in the tax reform debate, also made this case at a recent event with POLITICO, arguing that abandoning the border tax and immediate expensing would make any tax package less friendly to growth.

“I’m confident you can’t do a pro-growth a tax reform. You certainly will struggle to create a level playing field for made in America products and services,” he said. “So we’ll be less competitive for the long term.”

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Source: POLITICO – TOP Stories

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