Investors are generally warned that past performance is no guide to future performance. Judging by Donald Trump’s radical economic policy pronouncements in the current election campaign, voters should be warned not to expect the same satisfactory economic performance in a potential second Trump term as we had in his first term in office. Indeed, there is every reason to fear that if Trump were to be elected and to implement his proposed economic policies, the American electorate might soon have buyer’s remorse as it bore the economic costs.
Start with Trump’s proposed international trade policy. In a manner reminiscent of the highly unfortunate 1930 Smoot-Hawley Tariff Act that aggravated the Great Depression, Trump is proposing a very much more aggressive and go it alone trade policy than he pursued in his first term. Not only is he proposing a 60 percent tariff on all Chinese imports. He is proposing a 10–20 percent tariff on the imports from the rest of our trade partners.
It is difficult to see how such a unilateral trade policy in flagrant violation of World Trade Organization rules would not lead to retaliation by our trade partners with import tariff increases of their own. As in the 1930s, that could lead us down the destructive path of beggar-my-neighbor trade policies that could cause major disruption to the international trade system. Such an occurrence would be particularly harmful to our export industries and would heighten the chances of both a US and worldwide economic recession.
Other untoward consequences of Trump’s proposed trade policy are that it would add to every household’s tax bill and it would increase inflation both directly and by stifling foreign competition. According to the Peterson Institute of International Economics, the higher tariffs would constitute a tax of around $2,600 a year on the average American household. According to Goldman Sachs, Mr. Trump’s tariff policy could increase inflation by more than one percentage point.
Trump’s proposed tax cuts constitute another major threat to our country’s long-term economic prosperity. At a time when our budget deficit is already at seven percent of GDP, and when the Congressional Budget Office is warning that our public debt is on a path to exceed 120 percent of GDP by 2034, Trump is proposing a slew of unfunded tax cuts including the extension of the corporate tax cuts he enacted while president. According to the Penn-Wharton budget model, Trump’s tax cut proposals would add over $5 trillion to the budget deficit over the next 10 years.
Since the US government borrows in US dollars, it is highly improbable that it will ever default on its debts. The Federal Reserve will always be able to print the dollars needed to finance the government and repay its debt obligations. However, putting the country’s debt on an ever-rising trajectory risks inviting a dollar crisis and the return of the bond vigilantes. That in turn raises the specter of another burst of inflation as the Federal Reserve would be forced to print money to cover the government’s borrowing needs.
Yet another way that Trump might seriously damage the economy would be if he were to carry out his threat to deport over 10 million illegal immigrants. It seems to have escaped Trump’s notice that over the past two years, the influx of immigrants has allowed the Federal Reserve to achieve its objective of bringing down inflation without causing an economic slowdown. One has to expect that at a time when the labor market remains tight, the deportation of millions of immigrant workers will cause both a slowdown in economic growth and a spike in wages and prices.
H. L. Mencken famously wrote that democracy is the theory that the common people know what they want and deserve to get it good and hard. If Trump is elected for another term on the expectation of sound economic stewardship, we will have yet another example at hand of what Mencken had in mind when we come to pay the steep economic price for Trump’s dangerous economic ideas.
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