EconoMatters, Rethinking America

How to Assess the Trump Economy in a Global Context

A reality check on what’s really ahead for US infrastructure, tax cuts, health care and protectionism.

Credit: STILLFX Shutterstock.com

Takeaways


  • Replacing Obamacare may instigate more competition but it won’t lower the prices of drugs, medical devices and services.
  • The impact of more spending could accelerate GDP growth somewhat but at the expense of significant federal borrowing.
  • The West is headed for a mighty fiscal stimulus. Employment, wages and incomes will rise — a lot!

Both Trump and Hillary Clinton promised sorely needed additional spending on roads and public structures — schools, railway stations and the like.

Infrastructure: A reality check

Thoughtful proposals have been put forward to pay for some of these projects with private funds — for example, encouraging private businesses to build toll roads — but most projects only deliver revenue to investors over many years and up front private borrowing will be needed.

Many projects, such as public facilities like parks and most mass transit, simply can’t generate enough revenue directly through user fees to attract private capital. Those must be financed by new federal and state governments bonds.

Health care: Immense cost pressures remain

Replacing Obamacare with direct subsidies and tax credits to help low and middle income Americans purchase health care may instigate more competition among private insurance companies, but it won’t fundamentally lower prices for drugs, medical devices and the services offered by physicians, hospitals and the like.

That would require implementing more far reaching reforms, such as the price controls imposed by the German government on its system of private insurance and those are not likely to find much appeal in a Republican dominated Congress.

Combat with subsidies?

In the end, providing relief from whopping increases in health insurance premiums for the millions of Americans who purchase individual policies on HealthCare.gov will require Congress to allocate more money for subsidies — even if individuals are empowered to purchase insurance across state lines.

Otherwise, they will face even higher deductibles, copays and limitations on coverage than Obamacare policies now impose. That will boost the federal deficit and require more borrowing.

Tax cut financing: Loopholes only go so far

Lowering corporate rates and slicing rates paid by small businesses that file individual federal and state tax returns can only be partially financed by closing loopholes and will increase the deficit.

Similarly, providing a child care benefit to young families and broader individual tax relief won’t be free.

Cutting taxes may boost growth — for example, a $100 billion tax cut overall many increase GDP by $120 billion, and that could generate as much as $30 billion in new revenue, but it would still swell the deficit by $70 billion.

The impact of more spending on infrastructure, health care and tax relief could easily accelerate GDP growth by one percentage point but only at the expense of raising federal borrowing by hundreds of billions.

Will Europe go down same road as the United States?

Moreover, after years of austerity, European governments were poised to increase deficits even before Trump’s election.

Now, nationalist movements on the continent are emboldened by his dramatic victory, and this will likely encourage sitting governments in France, Germany and elsewhere to placate voters with even more spending.

Overall, the West is headed for a mighty fiscal stimulus. With high unemployment throughout most of southern Europe and many prime working age Americans standing on the sidelines, employment, wages and incomes will rise — a lot!

Protectionism: Another reality check

The advocates of corporate globalization are apoplectic that Trump’s promise to redefine trade with Mexico, China and others will wholly disrupt international commerce. However, look for cooler heads to prevail.

U.S. manufacturing supply chains are too integrated with Mexican and Chinese facilities to be simply disrupted by huge new tariffs.

Instead, Trump has options to leverage our trading partners to renegotiate existing agreements to reduce the U.S. trade deficit. That would further increase the demand for what Americans make.

Some of this burst in borrowing and GDP will simply increase inflation but most will result in the production of more U.S.-made goods and services. Either way, interest rates and corporate profits will rise.

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About Peter Morici

Peter Morici is a professor of international business at the University of Maryland in College Park. [United States]

Responses to “How to Assess the Trump Economy in a Global Context”

Archived Comments.

  1. On November 22, 2016 at 7:13 pm 20eric responded with... #

    Beats me every time, when it comes to war and destruction we have all the money, but none when it comes to build and improve civilian projects.

  2. On November 24, 2016 at 8:19 am colchuck responded with... #

    They need to go after all the graft and corruption in the Military Industrial Complex where billions in savings can easily be found.