Donald Trump and 'Abundant Growth' Amount to Wishful GOP Thinking
It's frequently said that the 2003 tax cuts were the high-water mark of the George W. Bush years. Rate cuts on income and capital gains lowered the penalty placed on work in concert with reduced penalties on the investment that creates new companies and jobs. Bush did well there, and considering the happy reality that it's hard to get Congress to pass any kind of legislation, Bush did amazingly well. The problem for him was that he didn't stop at tax cuts. The rest of his economic record was pretty awful.
The list is long, but early in his administration he signed the Sarbanes-Oxley Act with great gusto. This legislation forced CEOs to act as accountants, as opposed to entrepreneurs pursuing profits for shareholders. Legislation that threatens jail for an incorrect income statement tends to have that kind of chilling effect on normally innovative company heads.
Bush sought and negatively achieved tariffs on steel, softwood lumber, and shrimp, not to mention that his administration regularly bashed China and its imports to the U.S. despite those imports amounting to a daily raise for all Americans. That the Bush administration wasn't exactly open to trade signaled to the markets that Bush and the Bush Treasury were very comfortable with a weak dollar. This was a reversal of the Reagan and Clinton years in which the dollar was strong, and largely stable. The dollar's decline during the Bush years was rapid; the greenback having purchased 1/260th of an ounce of gold when Bush entered office versus 1/920th of an ounce around the time of his departure.
The weak dollar led to an artificial oil price boom that drove the most economically advanced country in the world into exploration for a commodity ably supplied by some of the most economically backward countries on earth. Worse, it made investment careful as weak currencies always do. Opposite the technology-driven IPO style economy that defined the ‘80s and ‘90s when the currency was stable, the Bush years were defined by a lack of technological advance as the economy moved backwards into exploration for what was prosaic, and already well-supplied by relatively primitive countries. And as is always the case when currencies are weak, existing forms of wealth like housing were consumed with great constancy over investment in equity income streams representing future wealth creation.
And then when this housing-consumption boom happily ground to a halt, rather than let markets correct what was so plainly inimical to prosperity, the Bush administration chose to bail out the financial institutions most exposed to the very wealth consumption that was holding the economy down. Banks that should have been allowed to fail were rendered wards of the state, thus compounding what began as a monetary policy error from the Bush Treasury. Amid all this, Bush appointed Ben Bernanke as Fed Chairman despite Bernanke having made his reverence for the worst ideas of Keynesianism and Monetarism rather plain.
Bush left office with the stock market lower than it was when he arrived, the dollar was a fraction of its former self, and the economy was by all accounts quite depressed. Barack Obama would never have been elected in normal times; rather he was the electorate's response to Bush's charitably awful economic record. What's important to stress here is that while his tax cuts were very good, they don't work very well when combined with awful monetary, trade and regulatory policy.
All of which brings to Donald Trump, the presumptive Republican nominee for President of the United States. Trump has an exciting tax plan whereby he would propose to Congress income, capital gains and corporate tax cuts. Arguably the greatest aspect of his tax proposal is a zeroing out of the estate tax which would free up abundant risk capital to fund the promising companies of tomorrow. But as legislative realities dictate, what he wants and what Congress will agree to are far apart. This will be particularly true when we consider how energized the Democrats will be when it comes to blocking Trump's legislative desires. The good news is that energized Republicans will similarly block much of what a President Hillary Clinton would like. Good.
So while it's easy to predict that a President Trump won't get the tax cuts he's proposed, it's similarly easy to predict that he'll more likely get his way on the trade front. See the next paragraph. The problem there is that his ideas on trade are hideously bad. Even though abundant foreign imports are the surest sign of a country's prosperity, and even though imports allow those who purchase them to focus most on the work they do best, Trump's stated objective is tariffs of the 45 percent variety on Chinese goods. There will be raises no more for American workers if Trump is elected president thanks to the much higher taxes on imports that he loudly seeks.
And as evidenced by the increasingly protectionist nature of the Democratic Party (Obama and Clinton could only pass free trade legislation with the help of Republicans), Trump's odds of getting tariffs through Congress will be much greater. Major tax cuts will be near impossible for the New York businessman, but tariff increases won't be. Importantly, tariffs invariably signal to markets a desire on the part of the President for a weaker currency, and as Presidents invariably get the dollar they want, awful tariffs paired with a weak dollar will severely dampen investment in the companies and jobs that drive prosperity in the first place.
Some will respond that Trump is a successful businessman who will pursue growth-oriented ideas, and while true about his business achievements, so are Warren Buffett, Bill Gates and David Geffen successful; quite a bit more than Trump. Would anyone want them and their lousy ideas guiding U.S. policy? The bigger truth is that the very tax cuts that Trump would only get a portion of would be discredited economically by the certain wreckage that always and everywhere springs from tariffs and currency devaluation. Trump's economic plan as stated would fail impressively. If Republicans despise Obama, do they want to contemplate the Democratic savior that will emerge from a failed Trump presidency alongside a discredited Republican Party?
As for this comical notion that Trump may be another Ronald Reagan (Reagan once disdained by the elites too), let's be serious. Reagan's favorite economic thinker was the wildly brilliant 19th century French political economist Fredric Bastiat. Does anyone think Trump has ever even heard of him? Reagan had well thought out policy ideas, and while he erred impressively on occasion, it insults his great legacy when hopeful Republicans attempt to draw similarities between Trump and Reagan.
What can't be stressed enough is that tax cuts, while great, are not enough. If the rest of the policy is bad, tax cuts don't work. See George W. Bush once again. The only hope for a successful Trump presidency is that Congress blocks him on everything. Same with Hillary Clinton. Barring certainty about gridlock, Republicans would be wise to curb their feigned enthusiasm with the long game in mind.