In this edition of CMU Insider’s series of evaluating the economic policies of presidential candidates and examining how they contrast with the consensus of economists, I have Donald Trump in my sights.
As was true previously, I am focusing on economic policy alone because it is my field of study and therefore I feel I am less likely to be incorrect than if I were to examine, for example, foreign policy.
Maybe you happen to like the Donald because he insults women as “fat pigs, dogs, slobs,” etc., takes time out of his schedule to engage in Twitter flame wars, plans on cutting the head off ISIS and taking their oil, or you maybe simply enjoy his traits like “a cult of action, a celebration of aggressive masculinity, an intolerance of criticism, a fear of difference and outsiders, a pitch to the frustrations of the lower middle class, an intense nationalism and resentment at national humiliation, and a ‘popular elitism’ that promises every citizen that they’re part of ‘the best people of the world'” (which may or may not be seven of the hallmarks of fascism). Regardless, that unfortunately falls outside the purview of this writing.
In order to actually determine the Donald’s
fascistic policies, I will delve into what is written on his website (please don’t click that link).
Reforming the U.S.-China Trade Relationship to Make America Great Again
Trump is under the impression trade with China has devastated the U.S. economy.
According to his website, “Since China joined the WTO, Americans have witnessed the closure of more than 50,000 factories and the loss of tens of millions of jobs . It was not a good deal for America then and it’s a bad deal now.”
Virtually every economist disagrees. It is true that some small number of Americans are perhaps worse off if they were laid off as a result of a factory outsourcing to China; however, most Americans are clearly better off from the significantly cheaper goods China is able to produce.
Trade with China is beneficial for the same reason as free trade in general. Countries due to their unique circumstances are each capable of producing different goods/services at differing costs. It makes the world richer in the long-run if countries specialize in goods/services they are able to produce at lesser costs, because we get more, better and cheaper stuff this way than what is otherwise possible with all else equal.
Even “unfair” trade practices such as foreign governments heavily subsidizing industries and thus flooding markets with artificially cheap goods I am confident are broadly beneficial to Americans.
Take the case of American light bulb manufacturers. Most Americans are unaware of their present ongoing plight. A foreign nation is currently exporting light at a heavily government subsidized rate that lowers the price of their exported light to close to zero. Many Americans, whether they realize it or not, have begun to heavily rely upon this foreign source of light because it is so cheap compared to our American made equivalent. It is clearly negatively impacting the American light bulb sector as a result.
The name of the country behind this nefarious practice is called the sun. Although it is true those working in the light bulb and related sectors are perhaps adversely impacted by such trade practices, it makes about as much sense for the U.S. to tax foreign exports in the name of protecting native workers as it does constructing a giant opaque dome around the nation to block the sun in the name of protecting light bulb manufacturers.
As such, it should come as no surprise that economists support free trade in general with as much enthusiasm as trade with China.
Furthermore, Trump’s rhetoric here leads me to believe he thinks there is some sort of “fixed” number of jobs that can be salvaged from “the job mines” each year. This is a classic error known as the lump of labor fallacy.
The reason this logic is flawed is because there is not a fixed amount of work or jobs that can be done. Millions of African Americans entering the labor force after the Civil War did not cause spikes in unemployment. Neither did millions of women in the years after the second world war. Neither did the invention of massive tractors when they rendered millions of farmhands obsolete. Neither does the outsourcing of plastic toys to China.
That’s not to say these things occurred without harm or foul to anyone. I am sure some people were made worse off from these events. This happens because their employment may be temporarily disrupted (instead of being outright displaced as Trump argues) and they will find a new job, which may not pay as well even after accounting for the benefits of less expensive and superior goods these events all brought about.
Perhaps some would argue I am not being fair to Trump here, but he goes on to make the same mistake when discussing immigration as we will see later on.
Therefore, it seems to me that if one truly did care about those who were harmed by the effects of trade with China (even though they are massively outweighed by the benefits), its more beneficial to discuss worker re-education programs or increased temporary welfare while they are in between jobs. Trump does neither of these things.
What he does mention are the following solutions to tackle the “problem” of trade with China.
1. “Bring China to the bargaining table by immediately declaring it a currency manipulator.”
I have no clue what Trump means here or what he is even declaring an issue. Economists generally agree it is difficult to actually detect currency manipulation, and foreign nations practicing it generally does not make Americans worse off.
2. “Protect American ingenuity and investment by forcing China to uphold intellectual property laws and stop their unfair and unlawful practice of forcing U.S. companies to share proprietary technology with Chinese competitors as a condition of entry to China’s market.”
I’m fairly unfamiliar with intellectual property law and don’t know about what sort of costs if any is imposed upon Americans by Chinese infringement on their intellectual property rights. However, the standardization of these laws across countries is generally beneficial and that is what the recently passed Trans-Pacific Partnership did for most Pacific countries, China excluded. My understanding is the newly Obama-signed TPP is intended to force some pressures on China to do precisely this.
3.”Reclaim millions of American jobs and reviving American manufacturing by putting an end to China’s illegal export subsidies and lax labor and environmental standards. No more sweatshops or pollution havens stealing jobs from American workers.”
I’ve already discussed how export subsidies are beneficial to Americans (they are essentially wealth transfers from the Chinese government to American citizens) and how jobs aren’t “stolen,” but instead, temporarily disrupted. Manufacturing jobs have decreased several million from their all-time high in the U.S., but they have been increasing steadily since roughly 2010.
Regardless, based on the increase in jobs in other sectors, it seems more Americans are in general transferring to better-paying and more productive sectors that require greater education. Targeting greater worker education and skills in lieu of somehow strong-arming China into restricting policies that likely actually benefit the vast majority of Americans seems to me to not only be a policy that actually makes Americans significantly better off in the long-run, but one that we have far better control of as well.
Furthermore, these “lax labor and environmental standards” mean little to Chinese workers who earn tremendously more in these factories than what they ever could achieve living in countryside farms, hence their tremendous lines for jobs and suicide rates for factory work far less than national average.
I know Trump cares little for the global poor, but that is something I weigh heavily when analyzing free trade.
4. “Lower the corporate tax rate to 15% to unleash American ingenuity here at home and make us more globally competitive. This tax cut puts our rate 10 percentage points below China and 20 points below our current burdensome rate that pushes companies and jobs offshore.”
Holy crap, this is something I actually agree with Trump on for a variety of reasons.
The majority of evidence economists have suggested corporate taxes are regressive in nature. This means their tax burden is disproportionately levied upon the poor instead of the rich.
Anywhere from 45 to 85% of tax incidence (who pays the tax) of corporate profit taxes falls mainly upon non-supervisorial labor in the long run via the form of decreased wages. In my opinion, the most accurate estimate places around 70% of tax incidence on labor.
This is because companies actually reinvest most of their profits in themselves. If they don’t, they lose out to companies that do. As a result of investing in better capital like buildings, worker education/training or technology, employees become more productive and can earn more in the long-run for the company and (mainly) themselves.
Harvard economist Greg Mankiw, literally the man who wrote the most widely used textbooks on economics, has found that roughly 50% of revenue lost from a reduction in corporate taxes is recouped in the long-run because they are one of the most harmful taxes to growth. That’s obviously not enough to plug the increased deficit this would bring, but in my eyes, the benefits are clear enough that a significant reduction of this tax outweighs the costs.
As I’ve said before, that’s why many left-wing and right-wing economists actually support eliminating or lowering the U.S. corporate income tax. It is foolish to tax corporations in the name of taxing rich people, because it really does not.
Additionally, it’s worth nothing the U.S.’s current rate after accounting for federal and state corporate taxes is one of the highest in the entire world. After adjusting for tax breaks and what not, the effective rate is not as high as it first appears, but if the federal corporate tax rate were lowered to 15%, it would allow these loopholes to be closed. Additionally, 15% brings the federal rate to being much closer in line with the rates of Canada, the U.K., Ireland, Sweden and most of the western world.
It is backwards that the U.S. has not already done this and the wages of most working Americans will continue to be unknowingly garnished in effect from our absurd corporate tax code.
5. “Attack our debt and deficit by vigorously eliminating waste, fraud and abuse in the Federal government, ending redundant government programs, and growing the economy to increase tax revenues. Closing the deficit and reducing our debt will mean China cannot blackmail us with our own Treasury bonds.”
This is all pretty generic stuff all politicians say. The one thing I want to highlight is how much of our debt is actually held by China.
Conversely to popular belief, most U.S. government debt is actually held by the U.S. in some way, shape or form. Of all debt, only about 34% is foreign held. In all, China holds about 8% of the U.S.’s total debt, which makes sense considering it is the world’s largest economy. What you may not know is Japan and Ireland holds more U.S. debt combined than China. I for one have never heard Trump or his ilk discuss the threat a Japanese-Potato alliance may pose to our country.
It’s not really my place to discuss the political science implications of China holding 8% of the U.S.’s total debt, but I imagine it’s not much of a big deal and blackmail seems like an awfully harsh word for Trump to choose here.
Tax Reform That Will Make America Great Again
Trump’s proposals here are actually a pretty solid typical Republican proposal (that they’ve discussed for generations now without implementation).
- “Tax relief for middle class Americans: In order to achieve the American dream, let people keep more money in their pockets and increase after-tax wages.”
- “Simplify the tax code to reduce the headaches Americans face in preparing their taxes and let everyone keep more of their money.”
- “Grow the American economy by discouraging corporate inversions, adding a huge number of new jobs, and making America globally competitive again.”
- “Doesn’t add to our debt and deficit, which are already too large.”
Trump gets into more specifics, but nothing is remotely outlandish and his proposals are arguably worth implementing.
Grossly high tax rates aside, generally as a nation raises taxes it will reduce its growth rate, but increase its revenues. Therefore, a country’s tax rate should be as low as possible and roughly track with the costs of whatever services its citizens have agreed are the duty of their government to perform.
Additionally, when a country chooses to cut taxes, it’s broadly best to reduce taxes that are particularly harmful to growth. An example I have already discussed is reducing corporate taxes, a $1 reduction of which will yield roughly three times the long-run revenue of a $1 reduction in income taxes. I actually like that is the low-hanging fruit where Trump seems to have his focus as well.
Although tax cuts are nice, it is unwise to run deficits (as we witnessed in the Bush administration) caused by low taxes, wars and increasingly expensive healthcare costs. Their ensuing national debt (which has now surpassed the U.S.’s GDP) will be a problem in the future and drag down American wages and growth.
I have discussed similar ideas with regards to Rand Paul, but to tackle the upcoming debt crisis, the U.S. actually needs some combination of increasing tax revenues and/or reducing government spending. Tax cuts are not the solution to this problem and I actually see nothing from Trump that remotely indicates he has what is required to tackle this issue.
Immigration Reform That Will Make America Great Again
Before delving into any of Trumps claims, I want to set the actual framework for which immigration is being discussed at present in economics.
I think it’s important to note that economics can only evaluate positive claims such as whether low-skilled immigrants increase or decrease wages for natives. It cannot tell society how to weigh the costs and benefits of immigrants (but I can).
The majority of economic literature shows immigrants (even those with the lowest skills or have unauthorized residence in the U.S.) tend to increase wages. This occurs because immigrants shift outwards demand more by providing labor/services natives lack, as well as by purchasing American goods and services of their own. Hence, why immigrants generally have skill sets at the bottom or top when contrasted with natives.
However, immigrants also have a negative effect on wages. This happens to them increasing the supply of labor, which may decrease labor prices overall. Lower wages for natives ensues. I think this effect is particularly alarming, as most immigrants (including those who are unauthorized) generally have low skills. Thus, they drag downwards the pay of likewise unskilled natives, who, arguably, are the citizens most in need of a greater pay.
The looming million dollar question is which of these primary effects is greater? In general, I would say the most recent work demonstrates even unskilled immigrants broadly increase wages and increase the number of jobs available for Americans by more than one for each immigrant, so the first effect upon demand dominates. I for one would not rush to say this particular matter is settled, however.
An additional concern regarding immigration is crime. Immigrants, unauthorized or otherwise, commit crimes at about 1/5 the rate of comparable natives, and this has been a rate that has been falling for a long time. Their only sin is being unable to come to this country legally.
Speaking of which, the process of immigrating to the United States legally is incredibly bizarre and arcane. Individuals without any skills or a family connection to a citizen are basically screwed. Even for skilled immigrants, the wait to enter America can take upwards of a decade. Anybody who suggests, “My family came here legally, why can’t you,” is being incredibly disingenuous in my opinion.
Nevertheless, if immigrants do happen to be a net negative upon native wages (Borjas, the most pessimistic legitimate economist here doesn’t even find this effect to be greater than about 5%), it’s important to ask where one’s priorities are.
Global poverty would be annihilated under open immigration or merely expanded immigration. It is the single greatest policy towards eradicating poverty and it is not even be close.
It’s true the economy and employers would gain from further immigration (as well as potentially other native workers), but immigrants themselves capture more than 90% of the wealth gained by their entrance into the country.
All of that being said, what should Americans value more? A small portion of the U.S. labor force (in the most pessimistic scenario) receiving a marginal decrease in compensation and increase in their job frictions (again, something solvable through the safety net or any small tax on immigrants that may offset potential negative effects), or should we needlessly entrap millions unnecessarily in poverty?
To me, the answer is clear cut, even if this means only massively increased immigration in lieu of the open borders most of our ancestors were able to enjoy.
Plus if excellent food is something the U.S. values, Chinese, Indian, and Mexican (as well as I’m sure much more) foods are all amazing. In all seriousness, I don’t think most people think to consider little, unforeseen benefits such as that, which are brought about by the ensuing diversity immigration brings.
Keeping all of this in mind, economists more or less ubiquitously support increased immigration for highly skilled immigrants. It’s hard to imagine why more engineers, doctors or professors could possibly be a bad thing.
“A nation without borders is not a nation. There must be a wall across the southern border.”
I’ve never understood the fascination with some people who claim to be fiscal conservatives, but want to build a massive wall across the U.S.-Mexican border. To Trump’s credit, he “solves” this predicament by claiming he will be able to force Mexico to build and bear the costs of this wall…somehow.
Be that as it may, most unauthorized immigrants arriving in the U.S. at the border are not even Mexican, while planes and overstayed visas are clearly increasingly favored means of entry into the country. The wall also has a negligible ability to deter immigration and the border patrol may actually incentivize otherwise temporary workers to remain in the U.S. instead of returning home.
A titanic border-spanning wall is a big, fat, expensive, symbolic joke more fitting for a totalitarian regime attempting to prevent its citizens from escaping rather than a country built upon liberal and democratic values. Ditto for him wanting to triple the border patrol.
A more threatening Trump proposal that has actually gained some bi-partisan support is the implementation of a nationwide employment work verification system (E-verify). Civil liberty concerns aside, most research has shown such programs would be expensive to employers, inaccurate, and ineffective at actually being able to deter unauthorized immigration.
“A nation that does not serve its own citizens is not a nation. Any immigration plan must improve jobs, wages and security for all Americans.”
This claim is troublesome to me as Trump wants improved jobs, wages, and security for all Americans. That’s a million times easier said than done because at the end of the day, virtually every government policy is inevitably some sort of wealth transfer from some to others, at least in the interim.
I think it would be quite easy for an economist, even one such as Borjas who is generally opposed to low-skilled immigration, to devise a plan that would in the long-run carry out these tasks for most if not all Americans. It may be as simple as letting everyone in and imposing taxes or some sort of immigration fee on them, then distributing it to those immigrants may temporarily harm. That’s not exactly what Trump has in mind though…
Nothing else in Trump’s listed immigration section strikes me as particularly egregious (such as his remarks that he would not allow any Muslim immigration to the U.S. should he be elected); however, it all seems to rely upon the disputed notion that immigrants decrease wages and increase crime, while simply falsely asserting they are able to “steal” work or jobs.
Meanwhile, none of his proposals in this department would actually serve to better American workers in any sort of meaningful way (such as imposing taxes on immigrants to fund native job retraining or education).
Besides his shockingly solid tax proposal (assuming that Trump would actually somehow cut or slow spending, which I find unlikely) , almost everything else suggested by the Donald is laughably comical or built upon an incredibly flimsy, misleading premise. I’m fairly certain his main economic policies would actually harm the U.S. in a scope greater than any other candidate.
Keeping this in mind, I appropriately award him an F for his miserable policies and leanings towards a certain Italian political philosophy.
For more economic analysis, click here for Bernie Sanders, and parts one and two of Rand Paul’s economic policy. Wyatt Bush is the assistant editor of CMU Insider. You can contact him at firstname.lastname@example.org