Trump released his new economic plan yesterday, and the contents were pretty predictable. It’s essentially a blend of standard Republican ideas on taxation (lower) and regulation (less) combined with Trump’s continued insistence on protectionism. They make for strange bedfellows. Because while on the one hand, he proposes lowering income taxes and cutting and/or imposing a moratorium on new regulations, he also frequently talks about having new tariffs, which are just another tax.
There’s no particular reason to think Trump would be successful in getting these ideas passed even if he were elected, so we shouldn’t put too much stock in the details. Still, it’s worth noting that, except for protectionism, the ideas themselves are generally worthy of praise. Reducing regulation and taxes and simplifying the tax code are all good things for an economy. The last is particularly desirable because a complicated tax code only really benefits two groups: tax accountants, and the very wealthy people and corporations that can afford to hire them. A simpler tax code at a lower rate eliminates most of the energy expended on tax compliance and tax avoidance, and would tend to make tax rates more equal across different groups.
That said, simplifying the tax code, is also among the least likely things to happen because there are so many vested interests that would oppose it. But it’s a good idea in theory.
While the benefits of these ideas are not hard to understand, not everyone is so pleased. Apparently forgetting that Congress has to (and will not) pass these ideas into law, many were appalled by the proposals.
For example, The New York Times seemed to be particularly incensed by them. After offering some initial biased coverage of Trump’s plan, the editorial board also rushed out a hysterical opinion on the matter. Here’s the apocalyptic introduction (emphasis mine):
Donald Trump said on Monday that he wanted to usher in “economic renewal,” but most of his proposals would hurt the economy, rack up huge deficits, accelerate climate change and leave the country isolated from the world.
There are two reasons this sort of attack is absurd.
New York Times as Deficit Hawks?
First, the center-left perspective of The New York Times isn’t exactly known for their concern about fiscal deficits or the national debt. And to confirm this, we need only look at… The New York Times itself. For example, just one week ago they published a piece on the Democratic and Republican economic programs, noting that both of them are going to run major deficits. But they had a much cheerier outlook on the matter then, all of seven days ago:
More borrowing might actually be healthy, many economists say, at least in the short term, by helping to elevate the economy’s long-depressed growth trajectory.
Or we could look to the views of economist Paul Krugman, who writes a regular column for the New York Times. Here’s what Krugman had to say last fall in an article that was actually titled “Debt is Good”. Check the link; I didn’t make that up (emphasis added):
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.
The precise contours of Krugman’s article aren’t relevant, but the point should be clear: The New York Times does not give a damn about the debt. They’re only pretending to in the most recent piece because they want to engage in some partisan point-scoring against Trump.
Hurt the Economy?
The mainstream Keynesian economic theory, which is shared by the Times, holds that the source of economic woes is fundamentally a lack of spending–by governments, businesses, and consumers. The solution for this is always more spending, and in economic terms, the particular source of that spending is not terribly important. Running government deficits is viewed as beneficial to this end.
But again, in the Keynesian view, it doesn’t really matter where the spending comes from so it doesn’t matter how the deficit arises. The deficit can come from new federal spending, which is supposed to directly stimulate the economy. Or the deficit may be caused by tax cuts, which also stimulate the economy as consumers with more income left over will tend to spend more. This explains why Congress, acting on this same theory in 2010, implemented a 2% payroll tax cut after the recession.
Thus, the idea that Trump’s massive proposed tax cuts are going to hurt the economy really doesn’t comport with even the standard Keynesian analysis. Indeed, it’s just the Republican-friendly version of the standard deficit stimulus prescription. The Democratic-friendly version involves more government spending instead of tax cuts, but the theoretical economic effect is not fundamentally different.
Now, some economists might argue that Trump’s plan would have a greater economic stimulus if more tax cuts were directed at middle-class people–who tend to save less than wealthy people. But again, this is an argument at the margins. The direction of the short-run impact is not in dispute; it would be positive.
The NYT’s claim that Trump’s plans would hurt the economic is simply not based on economic theory (not even on bad economic theory). Rather, they oppose his policies for other reasons, and are dressing it up as an economic argument for rhetorical effect.
The Real Threat of Trump’s Economic Program
The irony in all of this is that the Times is accidentally right on the question of deficits. The debt really does matter. The idea that the United States can endlessly borrow more money with no consequences is absurd–especially in a time when many traditional creditors of the United States, like China and the Gulf States, are struggling themselves.
But neither Clinton nor Trump is going to address the debt problem; both fully intend to run deficits. Only the source of the deficits differs.
On balance, there’s good reason to think that, if passed, the Trump program of reduced regulation and taxes would improve the economy somewhat (while protectionism would be harmful). But even if we grant that it would be a net positive effect, it’s not going to work miracles. And that’s what the economy would need to avoid an outright collapse, given all the precarious warning signs around right now.
And herein lies the most significant economic threat of a Donald Trump presidency. Even though Trump is unlikely to get any of his good ideas passed, and even though protectionism is a direct repudiation of capitalism, the media still paints him as a believer in the free market.
As a result, if and when the economy collapses on his watch, it is undoubtedly the free market that would once again take the fall for a disaster it did not cause.