The Folly of Trumponomics

Donald Trump’s administration will implement large tax cuts and substantial financial deregulation. President Trump may also change U.S. policies on trade, although precisely what he will do is less clear—and the shift may be more rhetorical than real. Trump is also likely to substantially cut or privatize federal spending. To the extent that his policies add up to a coherent economic strategy, they are reminiscent of Ronald Reagan’s, but with an extra dose of cronyism and the wild card of economic nationalism.

Trump himself and several of his key appointees are also poster children for oligarchy and even kleptocracy—government operated to serve the business interests of elites, including top officials. The intermingling of business, family, and government as the Trump administration takes shape unfortunately parallels what I have observed in corrupt developing countries over the past 30 years, including during my time as chief economist for the International Monetary Fund.

Despite emerging contradictions between his presidency and who he purported to be during the campaign, President Trump is likely to please his supporters in the short run. His tax cuts, promoted by supporters for their supposed supply-side benefits, could provide a temporary Keynesian jolt to demand. His gestures on trade, like pressuring Carrier to keep jobs in Indiana, will strike a tough posture and save a very small number of jobs. But over time, Trump supporters—and the rest of the country—will become profoundly disappointed as economic security, opportunity, and prosperity are undermined for most Americans.

Taxing, Spending, and Obfuscating

Amid this muddle, one thing is clear. There will be a big tax cut for upper-income Americans—this is the implication of Trump’s pledges during the presidential campaign, and this is also what Senate and House Republicans want. Steven Mnuchin, the nominee for Treasury secretary, says there will be no reduction in the amount of tax actually paid by rich Americans—arguing there will also be a limit on the deductions they can take. But the math of Trump’s proposals is quite straightforward, and the result of the planned reductions in personal, corporate, capital gains, and inheritance taxes is that the rich will undoubtedly pay less.

In other words, we will re-run a version of the economic experiment previously conducted in the 1980s under Reagan and again under George W. Bush. James Kwak and I wrote a book, White House Burning, on this issue, and there is really very little disagreement among careful analysts on what happened over the past 30 years. Lower taxes on rich people led to higher post-tax income for them and not much by way of higher incomes for others; inequality went up. Despite supply-side claims, reduced revenues increased budget deficits, giving Republicans a pretext for deeper spending cuts. During the same time period, manufacturing jobs declined, the median wage stagnated, and the job market became increasingly polarized.

As for economic insecurity—an issue emphasized by Mr. Trump—this is about to get much worse. Health insurance will be stripped away and partly privatized at the behest of House Republicans, who also hope to turn Medicare into some form of voucher program—effectively reducing benefits for older and lower-income Americans. They may face some resistance from their colleagues in a closely divided Senate, but Medicare already has a (voluntary) voucher component, the so-called Medicare Advantage program, which enrolls about a third of Medicare recipients. To provide greater space for tax cuts, Medicaid and the Supplemental Nutrition Assistance Program (previously known as food stamps) will likely become some form of block grant (a preset transfer amount to state and local government)—which is really just a way to cut these forms of assistance to people in need (many of whom have jobs, but are paid very low wages).

It is literally impossible to have a rational conversation—either about the data or about what happened in our recent economic history—with some leading House Republicans. Now this House Republican belief system appears likely to motivate and guide economic policy—Trump needs their support to pass legislation, and he is working closely with them, including Mike Pence, formerly a leading House Republican, as vice president, and Representative Tom Price, the nominee to be Secretary of Health and Human Services.

As for measuring potential loss of revenue from tax cuts, not to worry—the House Republicans have already changed the rules to reflect so-called “dynamic scoring.”  The Tax Policy Center estimates that under Trump’s tax plan, “federal revenues would fall by $6.2 trillion over the first decade before accounting for added interest costs. Including interest costs, the federal debt would rise by $7.2 trillion over the first decade and by $20.9 trillion by 2036.” But the official scoring by the Congressional Budget Office will likely show no such loss of revenue—because the Republican Congress has already mandated that tax cuts will stimulate economic growth by an enormous (and implausible) amount. The alternative (i.e., distorted) reality of Trump’s campaign rhetoric is about to show up also in the driest possible budget documents.

Watch carefully what happens on “infrastructure.” During the campaign, Trump seemed to support upgrading our national road, rail, and air transportation systems—and the need for renewal across the country goes much deeper. But as more detailed plans become evident, it seems likely that the actual Trump infrastructure program will just be a cover story for tax credits and privatizations—not genuine public infrastructure.

Expect a very large increase in our budget deficit and national debt, exactly as was forecast by reputable analysts during the election campaign. This might provide some short-term stimulus to the economy, as my colleague Olivier Blanchard suggests. In that scenario, there are longer-term problems in the form of higher deficits and more debt. As Blanchard points out, inequality is very likely to increase.

And in light of what has happened since the election, it’s not entirely clear that economic growth will pick up—keep in mind we are already in a recovery and the job creation numbers have been good for a long while (nearly 200,000 net new jobs per month since early 2010). And in recent weeks, stock prices have increased, but the yield on bonds has also jumped higher (up to 2.2 percent on the ten-year Treasury bond on November 15 and now around 2.4 percent; compared with 1.8 percent immediately before the election). This is a big and unexpected move, signaling that investors are worried about the potential impact on inflation.

It has been a long time since we had significant inflation in the United States, and many people seem to have forgotten how unpopular it is. Ronald Reagan told Americans they should care about the “misery index”—the sum of inflation and unemployment. And inflation is almost always bad for people on lower incomes, including pensions (which will not be fully indexed to rising costs). Trump’s supporters will not be so delighted once the full implications of his tax cuts and other macroeconomic policies begin to sink in.

Any Trump boom could also be short-circuited by the deepening crisis in Europe, even without the added assault of Trump-style protectionism. With the fall of the Italian government and Italy on the verge of a banking crisis—on top of the UK’s Brexit (planning to leave the European Union), and the rise of far-right Marine Le Pen in France—the European Union and its elements are coming under increasing pressure.

Ironically, the instigators of Europe’s latest economic crisis are Trump-style populists—and they draw explicit inspiration from Trump’s political brand. But their success will weaken the European economy, and hurt the U.S. economy and Trump’s brand at home.

Financial Deregulation

House Republicans are dead set on repealing financial regulation—rolling back the rules to what they were before 2008. Excessive financial deregulation leads to a predictable cycle of boom-bust-bailout, in which rich people do very well, and millions of people lose their jobs, their homes, and their futures.

During the last crisis, presumptive Treasury Secretary Mnuchin bought IndyMac, a distressed bank, receiving a great deal of help from the government—and then sold it at a large profit. At the same time, millions of Americans lost everything in the housing crash and their appeals for assistance of any kind fell on deaf ears. In fact, appeals for the reasonable restructuring of loans made by IndyMac were apparently also turned down; this lender has a reputation as ruthless (and careless) in its foreclosure practices.

If the Treasury Department ends up being headed by someone who gains from economic volatility, how careful would officials really want to be? Trump himself spoke of the housing crisis as a great opportunity—for him, that is. Rich and powerful people often do well from extreme booms and busts; most Americans do not.

Deregulating finance is always sold with the claim that it will boost growth, and in the short run perhaps the headline numbers will improve—but only because we do not measure the economy with any regard for macroeconomic risk. If we had risk-adjusted employment and output (and corporate profits) during the George W. Bush years, we would have realized that economic expansion was based on unsustainable risk-taking in the financial sector—manifest in the crisis of September 2008 and the deepest recession since the Great Depression.

Trump himself spoke of the housing crisis as a great opportunity—for him, that is. If the Treasury Department ends up being headed by someone who gains from economic volatility, how careful would officials really want to be? 

In the House Republican mantra, honed over six years of refusing to cooperate with President Barack Obama, financial deregulation did not contribute to the meltdown of 2008. These congressional representatives fervently believe that growth has been slow because of a supposedly high burden of regulation on business—despite the fact that the United States is one of the easiest places in the world to do business.

In reality, growth has been slow in recent years precisely because the financial crisis was so severe—and deregulation will set us up for another crisis. The question is just how long this will take to become evident to voters.

On finance, as well as on taxes, Trump and the House Republicans are likely to work hard and effectively together—creating what will become a more extreme version of the unequal and unstable George W. Bush–era economy. Expect consequences that are similar to what happened during and after the Bush regime.


There were some defects in the Trans-Pacific Partnership (TPP), as both presidential candidates discussed during the election campaign. But refusing to implement the TPP agreement or altering the North American Free Trade Agreement (NAFTA) is not likely to bring back manufacturing jobs—just as gutting the Environmental Protection Agency would not bring back coal.

There is a defensible version of economic nationalism, which includes investing in people (education and opportunities), building public infrastructure, and working to ensure that new technology creates jobs. Transitioning to a lower-carbon and greener economy can create both jobs and exports.

But Trump’s strategy is very far from this. In the short run, Trump may score some points with his supporters by talking tough on trade, although his corporate allies are likely to reduce that to mostly rhetoric. The president is likely to have a number of high-profile photo ops, when he strong-arms (or pays) a few corporations to keep a small number of jobs in the United States. 

The key part of reality missing from Trump’s vision is that manufacturing jobs have disappeared in recent decades primarily because of automation—not because of trade agreements or the supposedly high burden of taxation and regulation on business; again, the United States is one of the best and easiest places in the world to start and run a company.

The surge in imports from China in the early 2000s did have a negative impact on manufacturing, but this effect is hard to undo—and threatening a trade war (or talking on the phone with the president of Taiwan) will either have no significant effect or prove disruptive. Imposing tariffs on Chinese imports will result in retaliation; trade wars do not typically lead to higher growth or better jobs.

And one impact of Trump—a sharp appreciation of the dollar since his election—runs directly against what he wants to achieve. A stronger dollar means it is harder for firms to export from the United States, while imports become cheaper. The U.S. trade deficit (exports minus imports) will increase if the dollar remains at its current level.

If Trump’s fiscal policies push interest rates higher, as currently seems likely—either because of the market reaction or how the Federal Reserve feels compelled to respond—that will further strengthen the dollar and undermine manufacturing jobs in the United States. Again, the question is how long it will take his supporters to notice that Trump oversold them on what he would do. At some point, perhaps, this tips over into the perception that they—and everyone else—have actually been deceived.

Special Interests and Crony Capitalism

For now, Trump will retain some popularity, courtesy of a fiscal stimulus and economic nationalism. But over a longer period of time, reality will catch up with him. And at the heart of what will go wrong with the Trump administration—in perception and reality—is the role of special interests.

Candidate Trump made a big deal of wanting to “drain the swamp,” by which he meant reducing the power of special interests, including corporate lobbyists. Perhaps his highest-profile pledge in this regard was to introduce term limits for members of Congress—in fact, this was the first in a long list of commitments made in his Gettysburg speech on October 22, 2016. But one day after the election, Mitch McConnell, Republican leader in the Senate, said that there will be no such term limits. This takes the issue completely off the table.

On swamp-related issues more broadly, lobbyists were running Trump’s transition team, and the appointment process looks like a feeding frenzy for special interests, as they compete to get industry-friendly people into key positions and to advance their legislative agenda.

The bad news for the broader economy is that the Trump circle could allocate to themselves tens of billions of dollars, through government contracts, insider trading, and other mechanisms. The U.S. Constitution cleverly creates an intricate set of checks and balances precisely to put constraints on executive authority. But with Republicans in control of the executive branch, the legislature, and much of the judiciary (including the Supreme Court), there will not be much by way of disclosure, let alone effective oversight.

Representative Jason Chaffetz, chair of the powerful House Committee on Oversight and Government Reform, says he will further investigate Hillary Clinton’s use of a private email server. How exactly that will help ensure good governance over the next four years is unclear. The potential self-dealing of President Trump, his family, and his colleagues will cry out for serious investigations, but there will be no congressional venue for that unless Democrats take back the House or the Senate in 2018.

The United States is a rich nation, with the most advanced economy, military, and technology the world has ever seen. We also have its most advanced oligarchy. In the Trump iteration, special interests seem likely to focus a great deal of attention on enriching themselves and their friends—“the rules are for other people” seems likely to become the motto of this presidency.

Trump has already indicated that he may pursue foreign policy in ways that advance his (or his family’s) private business interests. And of course, Trump is famously proud of how he legally manipulates the bankruptcy system—a skill he shares with Wilbur Ross (incoming commerce secretary) and Steven Mnuchin (Treasury secretary).

None of these people inspire confidence in the outcomes for the broader economy. Most likely their policies will further enrich powerful insiders, cut effective worker earnings, and add little if anything to the productive economy.

All oligarchs always say the same thing—their projects are good for the country. And in the end, the outcomes are always identical: They have the yachts and the offshore accounts; everyone else gets nothing.

In Why Nations Fail, Daron Acemoglu and James Robinson documented the myriad ways in which powerful people around the world help themselves to economic riches and, along the way, undermine political institutions. There is often some short-term growth, seen in the headline numbers, but oligarch-centric economies are never inclusive—and lasting benefits always prove elusive. In fact, as those authors emphasize, oligarchic control is often a prelude to nations running into serious crisis and state failure.

If, by the time of his inauguration, Trump refuses to divest himself from his business interests—and if he continues to refuse to publish his tax returns (which would presumably show the full extent of his foreign relationships)—then we are just another profoundly oligarchic country, albeit with nuclear weapons.

What would be the U.S. role in the world if this happens? Probably we will have little sway. How can you lead other democracies when you are a laughingstock? Some other corrupt countries might want to cooperate, but this is worth very little. We are in the world of G-Zero. No one is in charge and there is chaos in many places. Only people who thrive on chaos will do well.

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