Donald Trump’s Economic Plan, Up Close, Doesn’

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Donald Trump’s Economic Plan, Up Close, Doesn’t Add Up


The campaign's claims that his whole plan will not add to the deficit rests on aggressive, tenuous or flawed assumptions

Peter Navarro, a business professor and economist at the University of California, Irvine, shown before the first presidential debate, co-wrote an analysis of Donald Trump’s economic plan.

http://blogs.wsj.com/economics/2016/10/18/don...nt-add-up/

Oct 18, 2016 6:36 am ET

Donald Trump’s tax cuts would result in $6 trillion in lost revenue over the next decade, according to several independent analyses.

His advisers disagree. They claim Mr. Trump’s entire program, including trade, regulation and energy, not just taxes, would generate so much growth there would be almost no increase in the deficit.

Their math doesn’t add up.

It rests on aggressive, tenuous or flawed assumptions: that deficits caused by tax cuts don’t raise interest rates; that removing regulations adds directly to gross domestic product; that oil and gas companies will rush to drill on newly opened federal land regardless of energy prices; and that protectionism expands the economy even if U.S. companies and workers are already working flat out.

“Scoring the Trump Economic Plan: Trade, Regulatory & Energy Policy Impacts” was written by Peter Navarro, a business professor and economist at the University of California, Irvine, and Wilbur Ross, a private equity investor. For this analysis I read the supporting documents and spoke to Mr. Navarro as well as several nonpartisan experts.

Let’s examine the assumptions within their scorecard.

First, the plan begins with an estimate by the Tax Foundation, a think tank, that Mr. Trump’s tax plan costs $4.4 trillion on a “static” basis, i.e. before any effect on economic growth. But that figure assumes Mr. Trump’s 15% corporate tax rate does not apply to businesses filing as individuals. Mr. Trump has repeatedly indicated that it will, which the Tax Foundation says would boost the price tag to $5.9 trillion.

Second, the Tax Foundation reckons the tax cut will boost investment, growth and tax revenue, reducing the 10-year deficit impact to $2.6 trillion. This rests on the crucial assumption that global capital is so mobile that U.S. budget deficits don’t push up U.S. interest rates.

Other economic models disagree, most importantly those at Congress’s own scorekeepers, the Joint Committee on Taxation and the Congressional Budget Office.

Both agencies assume that tax cuts financed by deficits raise interest rates, crowding out private investment and hurting growth.

In June 2003, the CBO concluded from several models that the positive effects on growth of George W. Bush’s tax cuts would likely be largely offset by higher interest rates.

Thus, Congress will almost certainly have to assume that Mr. Trump’s tax cut raises the deficit far more than the Tax Foundation thinks.

Next, the plan assumes that Mr. Trump can boost GDP by $200 billion per year and tax revenue by $40 billion just by cutting the existing regulatory burden, which the National Association of Manufacturers says costs the U.S. economy $2 trillion per year, by 10%.

But this is flawed math. Suppose Mr. Trump repeals a rule that requires a power plant to spend $1 million on smokestack scrubbers and inspection staff. The company could apply the $1 million to profit and pay tax on it. But in the meantime, the supplier of the scrubber and the inspection workers lose $1 million in sales and wages.

Saying that will boost GDP “is wrong,” says Douglas Holtz-Eakin, a former CBO director who was Republican presidential candidate John McCain’s main economic adviser in 2008.

“That’s a pure transfer.” Fewer regulations may boost investment, but the effects would be gradual, and must be measured against the quality of life the regulations were supposed to protect.

The Trump plan goes on to claim that opening up federal land for oil, gas and coal mining will raise GDP by $95 billion per year and tax revenue by $14 billion, which then grows as companies reinvest the profits.

It’s based on a study commissioned by the industry-backed Institute for Energy Research. The study’s author, Joseph Mason of Louisiana State University, estimated that opening federal land closed to exploration such as the Arctic National Wildlife Refuge could generate $127 billion per year in added GDP, and 2.7 million additional jobs.

But Mr. Mason says he simply estimated the value of newly available resources—not whether companies would actually drill for them. “I’m not making any dynamic projections of the number of leases that are offered, much less taken up,” he said.

Few would: Today’s prices are half those used by the study and oil and gas companies have already slashed capital spending plans through 2020 by about $1 trillion worldwide, roughly a third of that in the U.S.

The study projects mining employment will eventually rise 500,000, which is double the number of people now employed in oil, gas and coal mining, and a further two million jobs through the “multiplier,” i.e. the jobs created when a mining worker spends.

But that is a misuse of multipliers. The federal study Mr. Mason based his multiplier on assumes the firms involved are operating below capacity.

That’s reasonable for a short-term project in a depressed city. It’s not reasonable for an entire country at full employment, as the U.S. eventually will be in the coming decade. Jobs created by mining will be at the expense of some other sector.

Finally, Mr. Navarro and Mr. Ross claim that by renegotiating trade deals, the U.S. can cut imports and raise exports by enough to eliminate the $500 billion trade deficit, or 3% of GDP.

That, they say, would generate $767 billion in tax revenue over a decade. This glosses over the fallout of any trade war that results from unilateral U.S. tariffs.

More to the point, it ignores the fact that the people needed to produce those exports and replace those imports already have jobs. Eliminating the trade deficit might change the jobs they have, but not increase total employment. And since protectionism usually hurts productivity, GDP would not improve, either.

Mr. Navarro disputes that the U.S. is near full employment: “There are millions of missing and discouraged workers, long-term unemployed, that are not being counted,” he said.

Yet there simply aren’t enough workers, discouraged or otherwise, to generate all the growth Mr. Trump’s plan envisions, especially when he is also clamping down on immigration.

The bottom line is that looking at all of Mr. Trump’s economic program doesn’t portray his tax cut in any better a light.

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