The first 100 days of Donald Trump’s presidency of the United States have brought some good news and some bad news. The good news is that, albeit chaotically, he is governing more as an orthodox post-Reagan Republican than most expected. The bad news is that he is governing more as an orthodox Republican than most expected. This now seems true in all the main policy areas, both domestic and international. It is clearly true in economic policy.
The idea of rebuilding US infrastructure has faded. The trade protectionism looks halfhearted. But deregulation is still an objective. So is tax reform, with the familiar combination of unfunded giveaways and magical thinking on deficits. Mr Trump’s policies look ever more like Reagan’s, but from a more unfavourable starting point.
In announcing the tax plan, the White House did in an essential respect reinforce experience with this administration. It is hard to think of another government that would announce radical reforms of the tax system in a one-page document as sketchy as this one.
It would be laughable if it were not so damaging to the US reputation for competent policymaking. The plan must be dead on arrival in Congress, in large part because it is not alive in the first place.
The single page released by the White House last week does, however, contain very similar ideas to those announced by candidate Trump. This makes it possible for us to go back to the analysis published by the Tax Policy Center (TPC) in October.
While we have little reason to expect a plan just like this to be enacted, that earlier analysis does help us understand how far the administration’s starting point remains from common sense on fiscal policy.
Start with the effects on the fiscal deficit. According to the TPC, the plan would raise the federal deficit (even after allowing for beneficial macroeconomic effects) by a little under 3 per cent of gross domestic product for as long as it remains in place.
But, according to the International Monetary Fund, the US is already running a general government structural deficit of 4 per cent of GDP, forecast to rise to just under 6 per cent of GDP in the early 2020s.
To those that have it shall be given. That is the doctrine of Mr Trump. It is also the old Republican trickle-down doctrine in purest form
With the addition of the proposed tax cuts, a structural general government deficit of well over 8 per cent of GDP might emerge in the 2020s. This would cause an explosive rise in debt.
That could not be allowed to happen, particularly since US general government net debt is now more than 80 per cent of GDP, up from 45 per cent before the crisis and far lower when Reagan came to office.
The structural deficit needs to be reduced, not increased. Yet this fiscal boost is not intended to be temporary and would also occur when unemployment is at 4.5 per cent of the labour force. It would be of the wrong kind, at the wrong time.
Defenders suggest, in response, that the plan might pay for itself, via increased activity. Given the low unemployment rate, this seems quite unlikely. Yet US treasury secretary Steven Mnuchin has even suggested that, in combination with other administration policies, tax cuts could raise US trend growth to 3 per cent, from the current trend of slightly below 2 per cent.
Such a rise in growth would help. But it is very unlikely, for reasons explained by Jason Furman, former chairman of the Council of Economic Advisers. For it to happen, he argues, it would be far from sufficient for the decline in labour force participation to reverse.
There would also be a need for a rise in the growth of output per hour from the 1.2 per cent achieved in the last decade to 2.8 per cent. That rate of productivity growth has been extremely rare in the past, over any extended time period. It would be mad for policymakers simply to assume this will happen.
The question then is whether these huge tax cuts could be offset elsewhere. The border tax adjustment to corporation tax now seems to be a dead idea. So the only solution would be huge cuts in spending.
To reduce spending by, say, 2.5 per cent of GDP would mean a cut in federal spending of about 12 per cent. But nearly 90 per cent of that spending goes on defence, health, income security, veterans’ benefits, social security and interest. On the assumption that these items will be protected, every other item of federal spending would have to be eliminated. The federal government would, in many areas, vanish.
The tax proposals also look astoundingly regressive. According to the TPC’s analysis, the top 0.1 of the income distribution might receive an average tax cut approaching 14.2 per cent of after-tax income, while middle-income households would receive an average tax cut of 1.8 per cent.
Among the startlingly regressive changes would be repeal of the alternative minimum tax, repeal of estate taxes and huge reductions in corporate tax rates, including on so-called pass-through businesses. To those that have it shall be given. That is the doctrine of Mr Trump. It is also the old Republican trickle-down doctrine in purest form.
Mr Trump won the nomination by promising to be a different sort of Republican. He is not. What he has achieved is to make the “bait and switch” yet more obvious. Post-Reagan Republicans reached out to the base by campaigning on cultural issues, while legislating for the upper 1 per cent.
That is “pluto-populism”. Mr Trump added infrastructure spending, trade protectionism and support for Medicare and social security. But he too plans to deliver for the top 1 per cent.
Pluto-populism is highly politically effective. But it works by making the base ever angrier and more desperate. That is playing with political fire. The republic may survive Mr Trump. But what comes after?– (Copyright The Financial Times Limited 2017)