We’re all playing a guessing game. During the campaign, Donald Trump made many promises. But whether friend or foe, we don’t know what he will actually do. The result is a deluge of predictions from politicians, pundits, think tanks, lobbyists, economists and others. Here, for example, is the outlook of economists at Nomura Securities.
Conceding enormous “uncertainty,” the economists predict that large tax cuts, costing $3 trillion in lost revenue over the next decade, will be the centerpiece of Trump’s economic program. Coupled with the tax cuts would be $500 billion in added spending, mostly for infrastructure and defense. These amounts enlarge budget deficits, already estimated by the Congressional Budget Office to be $8.6 trillion over the decade.
The Republican Congress is expected to repeal the Affordable Care Act (“Obamacare”), but the timing and the availability of a replacement are unknown and, possibly, unsettled. Similarly, the economists anticipate “significant regulatory changes” — cutbacks — and more deportations of illegal immigrants. Again, details are unknown and perhaps nonexistent. Trade policy is the same; there have been unconfirmed reports that Trump will slap a temporary 5 percent to 10 percent tariff on all imports.
What’s the effect on the economy? Less than you might expect, say the Nomura economists. The tax cuts and regulatory cutbacks are assumed to increase economic growth initially (beginning in late summer), but then contradictory forces erode the effect. Faster economic growth and fear of more inflation cause long-term interest rates to rise; slower immigration puts upward pressure on wages. The Federal Reserve, also fearful of inflation, tightens credit by raising short-term interest rates.
“We expect the Fed will raise rates twice in 2017 and three times in 2018,” say the economists. (In December, the Fed raised short-term interest rates to a range from 0.5 percent to 0.75 percent. If future increases were the same amount, then the Fed funds rate would reach 1.75 percent to 2 percent sometime in 2018. From late 2008 to December 2015, it had been close to zero.)
Put all this together, and the economy’s growth — according to Nomura’s projections — doesn’t change much. Bigger deficits spur growth; higher interest rates restrain it. Gross domestic product is expected to grow 1.9 percent in 2017 and 1.8 percent in 2018. Since 2010, GDP growth has been roughly 2 percent a year.
The Nomura economists are skeptical of the claim, made by some Trump nominees, that lower taxes and fewer regulations can raise annual economic growth to a range of 3 percent to 4 percent. If this happened, federal budget deficits would be lower than expected, because a stronger economy would produce more tax revenue.
But, say the economists, lower tax rates and deregulation were tried in the 1980s. Airlines, interstate trucking, railroads and some energy markets were deregulated; the Tax Reform Act of 1986 cut tax rates sharply. “There is little evidence that deregulation and tax reform increased productivity during this period,” write the Nomura economists.
All this is informative — up to a point. It reflects what standard economic models produce when they’re fed plausible assumptions about Trump’s policies. But it’s possible that the full range of Trump’s proposals will combine to change how the economy operates in ways that, for good or ill, defy the assumptions in existing models.
Since World War II, the United States has had a “mixed economy,” with power shared between markets and government policy. In general, the drift has been toward more government. Moreover, for most of this period, the United States has been an “open” economy, emphasizing free trade and liberal immigration, both legal and illegal.
Trump seems to embrace a different model, albeit one awash in inconsistencies. Though he urges less government, he bullies major corporations to locate their plants in the United States, not in Mexico, China or anywhere else abroad. Similarly, he deplores the rising federal debt but has pledged not to touch two of the largest programs — Social Security and Medicare — that contribute to the debt.
All these changes collectively may alter the way the economy operates — to repeat, for good or ill. It may become more dynamic and productive; or it might become more protectionist and inflexible, as companies and consumers adapt cautiously to a more uncertain world. In either case, or many in between, the past is not prologue. Not even Trump may really know what comes next.
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