Donald Trump has three big problems, two of his own creation, one created by a ticking time bomb that Obama is leaving for him.
The first is his deal with Carrier—keep in the U.S. some although not all of the jobs the company was planning to move to Mexico, and we will arrange tax subsidies by the state of Indiana, repeal regulations you don’t like, keep in mind your “cooperation” when doling out government contracts, and who knows what else. Carrier is to keep in Indiana about 800 of the 2,100 jobs it was planning to move to Mexico, in return for a subsidy of seven million dollars from Indiana’s taxpayers. To make the deal look good— “1,000 jobs saved” is a lot better headline than “more than 60 percent of Carrier jobs to move to Mexico“—Carrier agreed to leave in Indiana 300 R&D jobs that it had no intention of taking south. Seven million dollars to buy 800 jobs comes to less than $9,000 per job, not a bad deal as these things go, especially since some of it will be recovered from taxes on the wages of the workers whose jobs are saved. Better still, the beneficiaries know who they are, and are publically and appropriately thankful to Trump, while the taxpayers bearing the cost won’t hardly notice. And if they do, Mike Pence’s successor will have to explain it all to them.
A decent deal but a rotten precedent. Trump threatened other companies with “consequences” if they take jobs abroad. Board rooms around the country are being entertained with Power Point presentations, “How To Turn A Credible Threat Of Plant Closure Into A Nice Subsidy.” That long-time opponent of government interference in free markets, socialist senator Bernie Sanders, commented in a Washington Post op-ed, “He has signaled to every corporation in America that they can threaten to offshore jobs in exchange for business-friendly tax benefits and incentives.” Indeed. But conservative Republican Mike Pence had a response to his socialist adversary, “The free market has been sorting it out and America’s been losing,” to which Trump added his amen, “Every time, every time.”
Trump’s second self-made problem comes from the combination of his plan to cut taxes, increase military spending, maintain spending on key entitlements, spend $1 trillion on infrastructure, all the while reducing the deficit. It would take a fudge factory running full out to generate enough footnotes to his budget proposal to demonstrate that this combination will not blow the deficit. Unless ….
Unless the tax cuts do stimulate growth and generate offsetting increases in tax revenues. Unlikely, although the cuts will do some of that. Unless the private sector comes forward to finance the entire infrastructure program. Unlikely, privately financed infrastructure projects will be designed to serve real needs by real consumers: private sector funders have no reason to build bridges to nowhere. And few reasons to fund a massive expansion of a network of toll roads: only 6,000 of the nation’s four million road miles are tolled, and toll roads are no magic bullet with which to slay the deficit dragon: toll-road operators in Indiana and Texas are filing for bankruptcy.
Socially desirable projects, those with net benefits that cannot be captured by private funders, will still have to come out of federal funds, and a Ryan-led House seems satisfied that it has done enough by passing a highway bill and is now aiming at deficit reduction.
Trump’s third problem is that ticking time bomb created by Obama. Fair or not, economic problems are blamed on the incumbent president, who therefore feels it reasonable to take credit for economic gains. Obama had an advantage early on in his time in office: He could claim that he was playing the very poor hand left him by his predecessor. Trump will have no such advantage. Steve Mnuchin, the to-be Secretary of the Treasury, says that the new administration’s tax cuts and regulatory reforms will produce growth in the 3 to 4 percent range. But the economy grew at an annual rate of 3.2 percent in the most recent quarter. Yes, this might be an aberration, and we might still be stuck closer to 1 percent. But explain that to voters, who will be wondering what went wrong if we sink back to lower growth, or why Trump should get credit for simply maintaining the Obama-created growth rate.
Another Trump promise is to add twenty million new jobs over the next ten years. That’s a lower annual rate of job creation than he is inheriting from Obama. So, voters might reasonably wonder, “What has Trump really done for us?” Especially since he will be moving into the White House when the unemployment rate among adult males is already down to a rock-bottom 4.2 percent, a figure reflected in higher consumer spending, a sign of the increased confidence workers have in keeping their jobs. Might Trump’s angry army of the disposed and disaffected dwindle away as the reality of more rapid growth and full employment bites? Or if the economy turns sour, as it might if
- Trump has his way and replaces Fed chair Janet Yellen when her term expires next year with someone who agrees with him that interest rates should rise, and a lot faster than Yellen would have them do, and
- The accumulated effect of Carrier-style interventions, so far a mild version of those that brought down non-market economies around the world, misallocates enough resources to slow economic and real income growth.
In short, Democrats will be able to claim that at best Trump has maintained the growth and job creation rates set by Obama. Which leaves the question of how the benefits are distributed. There is little question that Trump is on to something when he aims for more income redistribution than Republicans have in the past been willing to live with, surrendering some efficiency in order to re-create a feeling that market capitalism produces an equitable division of the wealth it creates. But Mnuchin’s tax reform plan seems to be headed in the opposite direction. He plans to cut corporate tax rates from 35 percent to 15 percent, eliminate the inheritance tax, and lower rates on the rich, offsetting those benefits with equal reductions in allowable deductions. That is not going to be the simplest thing to explain, especially since the Democrats and the media are not in the business of giving fair explanations to Trump programs.