Donald Trump's Impossible Economic Mission
Donald Trump, it seems, embraces the old dictum: Make no small plans. Already, he's published an agenda for his first 100 days in office, recalling Franklin's Roosevelt's launching of the New Deal. Not surprisingly, near the top of Trump's to-do list is a pledge to double economic growth from its recent desultory rate of 2% a year to 4% - through massive tax cuts, the relaxation of government regulations and measures that curtail imports.
Who might frustrate Trump?
How about: Donald J. Trump.
A huge contradiction sits at the core of his economic agenda. He wants faster economic growth (who doesn't?), but his proposed policies would also elevate economic uncertainty - and uncertainty hurts growth. If the president proposes deep tax cuts, what will Congress enact? Who will benefit, who won't? The same uncertainty applies to regulatory cutbacks and anti-import policies. Until the outlook clarifies, businesses and households postpone some spending. Growth suffers.
Of course, there's always some uncertainty. What makes this different is the breadth of Trump's proposals. He advocates wholesale upheavals of existing policies.
For example, his proposed tax cut would radically transform the income tax. It would have only three rates (12, 25 and 33) as opposed to today's seven rates. Its cost over a decade, according to the nonpartisan Tax Foundation, would be between $4.4 trillion and $5.9 trillion, equal to about 11% to 15% of present tax revenues over 10 years.
Or consider his trade plans. Trump isn't pushing marginal changes. He wants to renegotiate the North American Free Trade Agreement, which could dramatically shift trade flows with Mexico and Canada. (In 2015, these two countries absorbed $605 billion of U.S. exports and supplied $642 billion of imports.)
Much is unknown. On regulations, Trump would "cancel every unconstitutional executive action, memorandum and order issued by President Obama," a sweeping commitment whose actual effect is ambiguous.
These and other controversial proposals (on immigration and Obamacare, for instance) will inspire ferocious lobbying. As long as matters are unsettled, business managers and, probably, consumers may delay spending when they can. The crusade to speed economic growth would - at least temporarily - slow growth.
"Uncertainty is a real risk," says economist Michael Strain of the American Enterprise, a right-of-center think tank. "I'd be reluctant to start a business now, and if I had one, I'd be reluctant to increase payroll by 15% until I saw how things shake out."
There's more to this than an educated hunch. Three academic economists recently created an index of "policy uncertainty" to see whether greater uncertainty harmed economic growth. They found that it did. (The index is based on a review of newspaper articles, reports from the Congressional Budget Office and the forecasts of economists.)
Greater U.S. uncertainty "foreshadow(s) declines in investment, output and employment," write economists Scott R. Baker of Northwestern University, Nicholas Bloom of Stanford University and Steven J. Davis of the University of Chicago, in The Quarterly Journal of Economics.
A Trump presidency faces many paths to greater uncertainty: A clash between the White House and the Federal Reserve or a dispute over budget deficits are obvious possibilities. As Davis notes, some of Trump's non-economic pronouncements - questioning the future of NATO, for instance - also increase economic uncertainty.
None of this means that Trump can't get some or all of his program passed. It does mean that the process will be contentious and that the uncertainties will be at cross purposes with Trump's goal of faster growth. "The policy uncertainty is going to drive financial markets crazy," says economist Mark Zandi of Moody's Analytics. Stock prices, interest rates and exchange rates may all be especially volatile.
It's also an open question as to whether Trump's economic strategy will work as expected. Zandi, for one, is skeptical. Supply and demand are at odds, he says. Trump is stimulating demand with his massive tax cuts but limiting supply by discouraging imports and expelling illegal immigrants. Strong demand will ultimately collide with constricted supply. Inflation and interest rates will rise; a slump might follow.
Under the most favorable circumstances, Trump's big plan - his quest for faster economic growth - would be a daunting task. Under realistic circumstances, it could be mission impossible.