By Ben White
January 11, 2016
Many economists say Donald Trump’s proposals — from big import tariffs to mass deportations —would hurt the very demographic that supports him in the greatest numbers: less educated voters struggling in a tepid U.S. economy.
If Trump policies actually went into effect, these economists say, prices for goods lower-income Americans depend on could soar and a depleted low-end labor force could trigger a major downturn.
Trump's appeal rests in part on the sense that he will be a tougher negotiator with trading partners. But comparatively less attention has been given in debates and on the campaign trail to the actual substance of his economic proposals, opening a new line of attack for mainstream critics against his unconventional economic thinking.
“There is a good reason many people are upset and angry, because for many it’s been a very rough decade,” said Mark Zandi, chief economist for Moody’s Analytics and an adviser to John McCain’s 2008 presidential campaign. “But if Trump’s policies were enacted it would be some form of disaster for the economy. If you force 11 million undocumented immigrants to leave in a year, you would be looking at a depression. It would not help the people he is talking to, they would be the first to go down.”
The reasons for this are simple, economists say. The economy is close to reaching “full employment," adding another 292,000 jobs in December. The jobless rate remained at 5 percent.
If 11 million immigrants were rounded up and removed from the country, many of the jobs they do — including restaurant, hotel and low-end construction work — could go largely unfilled, economists say. That would create a large and immediate hit to gross domestic product growth and the effects would ripple out to companies that supply goods and services to all those businesses. There would also be 11 million fewer people consuming goods and services, further driving down economic activity.
And on trade, Trump has argued for imposing big tariffs on goods imported from Mexico, China and elsewhere. The problem with this, many economists say, is the tariffs would ultimately be paid by U.S. consumers in the form of higher prices and would not lead to any significant increase U.S. manufacturing.
“It’s a common mistake that people who don’t really understand economics make that this would somehow be a tariff on exporters,” said Mark J. Perry, a professor at the University of Michigan at Flint and a scholar at the conservative American Enterprise Institute. “It would be actually be a tax on American consumers. And more than half of U.S. imports come in as raw materials. And those cheap imports benefit American companies that hire American workers to finish the production process. Trump is really harkening back to the outdated mercantilist positions of hundreds of years ago.”
Trump is not without his defenders, even in the GOP establishment that he has spurned.
“I’ve spoken in defense of Donald’s tax policy and I will continue to defend it,” said conservative economist and Reagan administration official Larry Kudlow, who spoke just after talking to Trump at an event in New York on Friday. “The thing that’s so important in the tax policy is his corporate rate cut and easy repatriation of capital from abroad. These will add so much growth to the economy and the biggest beneficiaries will be middle income earners.”
Kudlow, however, like many other mainstream Republican economists, does not support Trump’s policies on immediate mass deportations or big trade tariffs. “I’m never going to support the deportations. And if you lower the corporate tax rate enough, capital is going to come back from China and you don’t need tariffs, which just hurt consumers.”
Other economists say while Trump has tapped into real problems — slack wages and general economic anxiety — his proposed solutions would not really help.
"It seems like economics is not really his highest priority. These are political stances," said Lindsey Piegza, chief economist at Stifel Nicolaus. "At a time when U.S. exports are on the decline as a result of the strong dollar, adding the threat of tariffs is going to add another negative impact on U.S. exports." Nations that face U.S. tariffs tend to respond with tariffs and other retaliatory moves of their own, setting off possible trade wars.
On immigration, Piegza said, Trump "is making some bold assumptions. He's saying if you remove 11 million people from the labor force that's suddenly 11 million jobs for Americans. But you have to assume Americans would be willing to take those jobs."
She added that even if some Americans do take those jobs — while presumably demanding higher pay — the cost of production and thus the cost of goods and services would rise, forcing consumers to pay more, eating up the wage gains.
Part of the problem with Trump, economists say, is the rhetoric that informs the real estate billionaire’s policies and thrills his supporters, is not based on economic reality.
“I saw a chart the other day, our real unemployment — because you have ninety million people that aren’t working,” Trump said last year. “Ninety-three million to be exact. If you start adding it up, our real unemployment rate is 42 percent.”
Trump appeared to be counting all Americans not in the work force. But that figure includes students, stay-at-home parents and the retired, among others. These people are not “unemployed,” they just don’t need or want to work and are not part of the labor force by choice. Even the broadest measure of unemployment which takes into account the under-employed and those “marginally” attached to the labor force is at 9.9 percent and falling, a figure not that far off of historic norms.
“He is just flat wrong about unemployment,” said Zandi. “Historically, even in the best of times and tightest of labor markers the under-employment rate is closer to nine percent and we will probably absorb that gap and be at full-employment by mid-year.” The Trump campaign did not respond to requests for comment on his economic policies and statements.
Trump also late last year suggested the U.S. economy might be in a “bubble” that could burst at anytime.
“Remember the word bubble? You heard it here first," Trump said in Iowa in December. “We could be on a bubble and that bubble could crash and it's not going to be a pretty picture," said Trump. “The market has gone down big league the last couple of weeks. We could be in a big fat bubble and if that bubble crashes, it's a problem."
Many economists say this is a misreading of the U.S. economy. Growth has been sluggish — moving forward at only around 2 percent — but there are very few signs that there are any bubbles with the possible exception of high-end commercial and residential real estate in certain markets, an area that Trump knows well.
“There is little chance that the US economy is a bubble. Retail sales and manufacturing output have looked dismal for months, despite lower oil prices,” said Megan Greene, chief economist at Manulife. “Most analysts are revising their economic forecasts for the US for 2015 and 2016 down--not up--to reflect poorer economic performance than expected. It is hard to see where the demand for a macroeconomic bubble in the US might come from given generally low global aggregate demand.”
While economists mostly disagree with Trump's assessment of the U.S. economy being in a bubble, some do suggest he could be right that U.S. stock prices, which got off to their worst start of the year ever, could fall even further as the Federal Reserve hikes interest rates this year and Chinese markets continue to face turmoil as the country tries to shift toward a model based on domestic consumption rather than relying on production and exports.
"If fundamentals fail to improve fast enough and validate asset prices, global markets risk going through a disruptive downward adjustment process that, in turn, could threaten the world’s economic well-being," said Mohamed A. El-Erian, chief economic adviser at Allianz.
Democrats, meanwhile, see an opening to appeal to Trump voters by acknowledging the struggles they face while arguing that the billionaire’s policies would be ineffective in driving faster growth or addressing economic inequality.
Former Secretary of State Hillary Clinton has spent much of her campaign talking about plans to invest more in infrastructure, boost some capital gains taxes and provide tax credits to companies that share profits more broadly with employees.
Vermont Senator Bernie Sanders has made more direct appeals to Trump voters. “What I'm suggesting is that what Trump has done with some success has taken that anger, taken those fears — which are legitimate — and converted them into anger against Mexicans, anger against Muslims," Sanders said on CBS last month. “For his working class and middle class support, we can make the case that if we really want to address the issues that people are concerned about. We need policies that bring us together, that take on the greed of Wall Street the greed of corporate America and create a middle class that works for all of us rather than an economy that works just for a few.”
Democratic-leaning economists say Trump is most vulnerable to attacks that his tax plan would deliver massive benefits to the wealthiest Americans. According to the Tax Policy Center, Trump’s tax plan would reduce federal revenue by $9.5 trillion over the next decade. It would also provide an average $1.3 million tax cut for the top 0.1 percent of earners, the Tax Policy Center found. The Trump campaign has disputed these findings.
Polls consistently show that voters of all partisan stripes favor tax hikes rather than tax cuts on the rich. And that leaves Democrats salivating at the idea of taking on Trump this fall.
“He takes a very populist tone on taxes but when you look at the plan it is very much weighted to cutting taxes at the very top,” said Heather Boushey, chief economist at the progressive Washington Center for Equitable Growth. “And this is by now a decades old story. If cutting taxes at the very top would really make America grow faster we should be growing a lot faster right now given how often we have done it.”
Boushey, however, did offer some sympathy for Trump's efforts to address workers impacted by previous free trade deals.
"There is a lot of new research documenting how when you open U.S. trade, that can actually lead to negative outcomes for workers," she said. "And that's why this anger from Trump supporters is real even if you don't support his policy proposals."
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