What to Expect from President Trump

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Michigan Ross faculty explain the potential policy direction of the president-elect.

With Donald Trump winning the U.S. presidency — and his party holding a majority in Congress — Michigan Ross professors sort out his likely policy agenda and the potential impact on business and the economy.

Professor Joel Slemrod on tax and economic policy:

Slemrod

“Can Donald Trump’s economic policies deliver the promised turnaround in the fortunes of the 99 percent that have experienced limited real income gains in recent decades? Most economists seriously doubt they can, concerned that turning against engagement with the global economy and enacting deficit-busting tax cuts will mostly hurt those people it is hoped they will help, and skeptical that loosening business regulation will provide much of a boost that is worth the cost in, for example, environmental degradation.

“Of course, how the campaign proposals are translated into law is uncertain even with a Republican-controlled Congress, given the divisions between the parties and, maybe more importantly, within the Republican Party. Finally, the odds that a Trump administration will deliver concrete economic gains diminish if his election triggers a recession, as businesses — both global and domestic — react by pulling back in cautious response to the prospect of radical new policies and their unknown consequences. Beginning his presidency in a recession cost President Obama a lot of policy flexibility as tax revenues plummeted and cries for stimulus arose. All of which is a shame, because finding a way to revive sustained growth that is widely shared rather than limited mostly to the already affluent 1 percent is the paramount economic challenge we face.”

Professor Linda Lim on trade:

“Trump’s campaign focused heavily on trade, especially NAFTA and other trade agreements, the U.S. trade deficit, and offshoring of manufacturing jobs. He has specifically said that he would impose large — 35 percent — tariffs on imports from Mexico and China. He does have the authority to do so unilaterally, and to terminate trade agreements after consulting with Congress.

“If he does do so, the consequences for the U.S. and world economies would be pretty dire. American consumers and businesses that depend on imported goods and inputs from Mexico and China would immediately be faced with higher costs and prices, and global supply chains would be disrupted, including for the auto industry. A trade war would likely result, with the impacted countries imposing retaliatory measures, hurting U.S. exports. There would be revenue losses and eventually business shutdowns and worker layoffs.

Lim

“U.S. economic growth and employment creation would be nipped in the bud and a recession would likely result. Since the U.S. is currently the strongest-growing large economy, the world economy as a whole would also slow and slip into recession, exacerbating the decline.

“Given these dire consequences, it is possible that Trump would NOT carry out his promises to restrict trade. Still, the mere threat of such protectionism would be sufficient to discourage some business investment and thus slow growth and employment creation.

“As for the trade deficit, it is mathematically determined by the balance between private sector savings and investment, and the government budget balance. High savings and low investment, and/or a reduced or eliminated budget deficit, could wipe out the deficit but at the cost of much lower growth or even recession. Japan, for example, has run current account (trade) surpluses during its past two-and-a-half ‘lost decades’ of slow economic growth and stagnation. We should not want the U.S. to end up in a similar position.”

Professor Tom Lyon on energy policy:

Lyon

“Based on his own comments, there is one overarching feature to a Trump Administration's energy policy: As president, Donald Trump will pretend climate change does not exist. This is an increasingly untenable position, even for committed climate ‘skeptics.’ His energy policy will encourage investment in high-carbon energy sources that will look foolish in retrospect. And he will anger much of the rest of the world by reneging on policies designed to address global challenges.

“Another likely effect of a Trump presidency on energy is that the U.S. renewable energy industry will languish as China pulls ahead of us. The U.S. has been a world leader in wind turbine technology, due in no small measure to the Renewable Portfolio Standards (RPSs) in many states that have shifted out the demand curve for wind power. More recently, China has raced down the learning curve of solar photovoltaic technology, lowering global PV prices in the process. A Trump Energy Department will devote less funding to R&D on renewable energy, because it does not believe that renewable power is needed. This will help reinforce Chinese leadership in the technology."

Professor Kyle Handley on the business effects of uncertainty:

“I would not make much of this short-term market volatility, and it is likely to last only a short time as it becomes more clear what the Trump presidency will look like.

“The longer lasting sources of uncertainty are the following:

  • What policies will Trump and a Republican Congress change?
  • When will those changes occur?
  • What will be the impact of a completely new set of Republican policy ideas unfettered by the need to compromise with a Democratic president or legislators?

“Trump could outline some concrete proposal and that would reduce uncertainty generally. However, many of his policy ideas have no precedent in U.S. history. So even if he is clear about his intentions, expectations about the effects of those policies are fraught with uncertainty. For example, large changes to immigration policy or a repeal of the Affordable Care Act are huge unknowns in terms of their effects on U.S. workers and businesses. For more standard economic policy changes, it’s easier to make predictions and final outcomes are less uncertain. For example, modifying the rate of corporate and personal incomes taxes or making changes to benefits levels in social programs generate well-known, short- to medium-term responses in terms of tax revenues, consumer behavior, or business investment rates. But the timing and magnitudes of the policy changes continue to be potentially large sources of uncertainty.

Handley

“The most dangerous aspect of the Trump candidacy and now the Trump presidency is a disdain for many institutions of the world economic and political system. Trump seems to view all international relationships as a transaction where the U.S. needs to get something tangible in return for any commitments. This ignores that those commitments are really a form of insurance against bad outcomes. For example, who would have thought Article 5 of the NATO alliance would have been invoked for the U.S. on September 11. It was intended as a form of insurance and deterrence against Russian aggression in Europe, but it turned out to be important in a different, unexpected context. Likewise on the economic policy front, the U.S. has many international trade commitments at the World Trade Organization, through NAFTA, and other free-trade agreements and bilateral investment treaties. These agreements are all intended to provide a stable, secure environment for U.S. and international businesses.

“When it becomes fashionable to threaten protectionism or promise to start a trade war with China, these global institutions are meant to restrain policy makers and prevent a return to 1930s-era beggar-thy-neighbor protectionism and economic isolationism. If U.S. firms are concerned their business opportunities abroad will be diminished by trade wars and a chipping away at 60 years of institutions meant to provide policy stability, that could indeed be very bad for the U.S. and the global economy. Bad policies can always be reversed at some point, creating the prospect of more uncertainty and more reasons for business to behave cautiously. I'm afraid the losses in terms of income and total well-being for the U.S. and the world might have permanent and lasting effects.”

 

Professor Thomas Buchmueller on healthcare:

Buchmueller

"First, unlike a number of things Donald Trump has talked about (like building a wall), repealing the Affordable Care Act is something that has long been a goal of Congressional Republicans, so it’s an area where we are likely to see action. Though they won't have 60 votes in the Senate, there may be ways to use budget bills, which are filibuster-proof, to get around that.

"I think the big question about the Affordable Care Act will become what Republicans want to put in its place. They don’t like the individual mandate nor the idea of spending money on poor people, so it is likely that they would try to repeal both. The hospital industry would be strongly opposed to that as would, I imagine, the insurance industry. Millions of people would lose their insurance and many others would see their premiums increase. So, repealing the ACA may be more politically costly than they realize."

 

Media Contact: michiganrosspr@umich.edu

Ross Thought In Action By Joel Slemrod
Joel Slemrod

Joel Slemrod

  • Paul W. McCracken Collegiate Professor of Business Economics
  • Professor of Economics
  • Chair, Department of Economics
  • Faculty Director, Office of Tax Policy Research