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Analysis: Trump Economic Plan Would Cause a Boom … Then a Terrible Bust
The above chart sums up a new Moody’s Analytics analysis of Donald Trump’s economic plan as is (the version that has excited the GOP’s supply-side wing): tax cuts, immigration, trade policy, and all.
Well, 2017 looks OK! (I circled it in red.) Nearly 4% GDP growth, which would be the first year of 3% growth or higher since 2005, and the best year since 3.8% growth in 2004. Moody’s thinks Trump’s “large tax cuts and bigger deficits actually support stronger consumer spending and economic growth” in a dose of mega-stimulus.
But then “the negative impacts of the higher interest rates caused by the large deficits take hold.” Recall that even dynamic scores of the Trump tax cuts find $1 trillion a year in budget deficits.
More from Moody’s:
The increased government borrowing causes interest rates to increase, crowding out private sector activities such as business investment, housing, and consumer spending on vehicles and other durables. … The economy will suffer a recession that begins in early 2018 and extends into 2020. During this downturn, real GDP will decline peak to trough by close to 2.4%. This would be an unusually lengthy recession—even longer than the Great Recession—although the severity of the decline in economic activity would be more consistent with a typical recession suffered since World War II. Employment will continue to decline and unemployment will rise into the next presidential term, with the unemployment rate peaking at 7.4% in summer 2021.
Of course, Trump doesn’t talk about taxes nearly as much as he does about immigration and trade. Let me focus on the latter since I have written so much about that lately:
The large increase in tariffs on Chinese and Mexican imports supported by Mr. Trump further exacerbates inflation pressures. The U.S. imports nearly $500 billion in goods a year from China, and another almost $300 billion from Mexico, accounting for approximately 35% of total U.S. non-petroleum goods imports. Outside of Canada, no other country comes close as a source of imports. Slapping a 45% tariff on Chinese imports and 35% on non-petroleum Mexican imports thus increases overall goods import prices by approximately 15%. This in turn lifts overall U.S. consumer prices by almost 3% at its peak six quarters after import prices increase, according to the Moody’s Analytics model.
The inflationary effect of the tariff hikes are heightened since they are assumed to occur in late 2017 and early 2018 when the economy is operating above full employment. U.S. importers will quickly look for other sources to replace the more expensive Chinese and Mexican imports, but this will take time. Manufacturers in Southeast Asia would be most likely to step in, but it will not be easy for them to ramp up production sufficiently, at least not quickly. It is also unlikely that global manufacturers would expand their operations in the U.S., at least not for a while. Given the extreme uncertainty that would be created by the tariffs, including questions regarding how long they would remain in place, on top of the long lead times involved in developing greenfield manufacturing facilities in the U.S., manufacturers would likely be very cautious and move slowly.
Adding to the economic fallout from the hike in U.S. tariffs is the response by China and Mexico. They would most likely retaliate with in-kind tariffs on U.S. imports. This would be a big hit to U.S. exports, as we ship well over $100 billion in products a year to China, and almost $250 billion to Mexico, accounting for approximately one-fourth of total U.S. goods exports. Canada is the largest destination for U.S. goods exports, followed by Mexico and then China. The value of the U.S. dollar also rises, as global investors are attracted to higher U.S. short-term interest rates due to the more aggressive Fed, and the extraordinary global uncertainty created by the trade war between the U.S. and its largest trading partners.
The U.S. economy is on shaky ground, but the global economy is in even worse shape, making the U.S. seem like a safe haven for scared global investors. A similar dynamic occurred during the recent financial crisis and Great Recession. The hit to U.S. exports from the higher Chinese and Mexican tariffs and stronger U.S. dollar is significant.
At the peak of the impact in 2019, U.S. real exports are reduced by nearly $85 billion, according to the Moody’s Analytics model. U.S. trade with the rest of the world will shrink as a result of Mr. Trump’s tariffs, and could decline further if the candidate’s seeming skepticism of past U.S. trade deals translates into no future deals.
Now Moody’s also offers a couple of alternative scenarios: Trump-lite and with lots of congressional compromise. But in any of these scenarios, “the U.S. economy will be more isolated and diminished,” Moody’s concludes.
Of course, Moody’s could be wrong. Its assumptions could be wrong. For instance: Moody’s assumes an economy at full employment, so there would be no slack to hire workers after his mass deportation. There are also assumptions about Fed policy, interest rates, wealth effects, and how different income groups would react to tax cuts. Lots of moving parts here. It will be interesting to see if Team Trump releases its own data-driven analysis showing a markedly different result.
Published in Economics
Why would anyone accept Moody’s analysis? They got the financial crisis totally wrong. And apparently they assume no spending cuts. For all Moody knows, Trumps renegotiation of trade deals might result in massive increases in trade, rather than punitive tariffs. If Japan lets us ship cars and rice to Japan, and China allows US imports, Moody’s will be completely off base. As it stands, the US allows imports from countries that don’t reciprocate on free trade. Changing that alone would have a large effect on the American economy. Lowering barriers to trade may be the effect of Trump’s plan. While he issues threats, he may be just setting the stage to get restrictionist countries to allow more American imports. Jim Pethokoukis does not, I hazard a guess, understand Trump’s intentions at all. Nor does Moody’s. A country that passes legislation based on CBO analysis cannot be said to function rationally in regards to economic analysis. Since no one can explain our current economic status of low labor market participation, stagnant GDP, low inflation that the Fed is struggling mightily to keep from turning into deflation(why, for heaven’s sake?), and massive deficits, etc. And Moody’s projections of growth on our current trajectory look insanely optimistic.Just getting rid of a few regulations would change everything. This is a fool’s game.
Why would anyone accept Moody’s analysis? They got the financial crisis totally wrong. And apparently they assume no spending cuts. For all Moody knows, Trumps renegotiation of trade deals might result in massive increases in trade, rather than punitive tariffs. If Japan lets us ship cars and rice to Japan, and China allows US imports, Moody’s will be completely off base. As it stands, the US allows imports from countries that don’t reciprocate on free trade. Changing that alone would have a large effect on the American economy. Lowering barriers to trade may be the effect of Trump’s plan. While he issues threats, he may be just setting the stage to get restrictionist countries to allow more American imports. Jim Pethokoukis does not, I hazard a guess, understand Trump’s intentions at all. Nor does Moody’s. A country that passes legislation based on CBO analysis cannot be said to function rationally in regards to economic analysis. Since no one can explain our current economic status of low labor market participation, stagnant GDP, low inflation that the Fed is struggling mightily to keep from turning into deflation(why, for heaven’s sake?), and massive deficits, etc. why would we expect anyone to be able to model economic growth for years to come? And Moody’s projections of growth on our current trajectory look insanely optimistic.Just getting rid of a few regulations would change everything. This is a fool’s game.
What is Moody’s track record for these kinds of predictive analyses in the past? Have their predictions for other presidential economic plans turned out to be correct?
Just in time to totally ruin The Summer Of Recovery, dang, that is such a bummer.
The Green line is if we make no changes? Really?
What is anyone’s predictive record in these kind of things? It seems the main problem is that no body actually implements the plans they say they will for all the obvious reasons of politics. So what we should ask really is what has been our record with various kinds of policies. Has imposing tariffs ever really lead us to having a better economy? Has cutting taxes? Or perhaps spending? If we go back far enough for our examples how relevant is the comparison given the differences in the natures of our economy back in 1890 vs. 2016? The more I learn about Macro economics the less certain I am that anyone actually knows anything about it well enough to make any predictions.
We don’t have a clue what would happen with the tax cuts proposed, nor what will actually be enacted. The Reagan economy faced record high interest rates, the Korean economy took off after interest rate repression ended, the same has happened in countless economies. Interest rates are the price of money or credit. Low interest rates mean there is weak demand, so if the economy is stimulated by animal spirits, positive expectations, lower taxes, or reduced regulations, then interest rates will rise and there are lots of consequences most of which are not predictable but in general are more likely to be positive. Higher interest rates allocate investment toward higher yielding investments, punish government spending, induce savings. Stock prices have to take a one time hit. Big deal. Government interest rate burden will increase and it will have to cut spending. That’s a political problem not an economic problem and in general is a good thing.
“The inflationary effect of the tariff hikes are heightened since they are assumed to occur in late 2017 and early 2018 when the economy is operating above full employment.”
How can anyone in their right mind talk about “full employment”in this economy? Male employment and black employment as a percentage of the workforce are at all time lows. Small business used to create ( when the economy was healthy) approximately two thirds of all new jobs. Now under Obama we are losing 30-50,000 small businesses net net a year, and losing untold jobs as a result. Beneath all the make believe growth and unemployment figures the economy is shrinking. Industrial production has declined for nine months in a row. Total Business Sales has been dropping for nearly two years and US Factory Orders have been dropping for 18 months in a row.
All that said, Trump’s solutions will absolutely not do the trick of reviving the economy.
The key to the American economy is small business growth. It was what set America apart for decades and generated much of our innovation . Without it, we become like every other socialized economy that is slowly dying.
The key to generating small business growth is :
A. As Son of Spengler says strongly restrain the abuse of our unconstitutionally abusive regulatory state.
B. Reform the Fed. Our most favored too big to fail big banks have largely gotten out of the banking business and no longer lend to start ups.