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Donald Trump; 4 billion dollars, 69 years old, and one of most controversial political figures who has ran for presidency. On June 16, 2015, he officially launched his presidential campaign. Half a year later he has come up with ludicrous policies - tackling issues concerning immigration, tax, and trade - that are both supported and heavily opposed. Nevertheless, what effects will Trump’s policies have on the American economy? In short, I believe the combination of his trade, tax, and immigration policies may potentially have positive effects if Trumps predictions go accordingly, however, in the long run, will cause an economic downturn in the U.S economy mainly due to the build up in national debt, lower productivity, and the drop in trade with China.
Firstly, according to the Political Insider, Donald Trumps policies are the as follows, “Those making up to $30,000 will pay 1 percent. Income from $30,000 to $100,000 results in a flat 5 percent. $100,000 to $1 million incomes will be taxed at 10 percent. On $1 million or above will be taxed 15 percent”. In short, Mr. Trump’s plan would compress today’s seven individual income-tax brackets into three and set a top rate of 25%, down from 39.6%. Essentially, this will increase consumer’s disposable income which may result in an increase in spending and aggregate demand.
This all sounds well and good, however, according to Fortune.com this decrease in taxation will “reduce federal revenues by $9.5 trillion over its first decade” which doesn’t include interest on treasury bonds. As it stands, America has a national debt of 17.5 trillion USD. For this figure to remain the same, according to CNNMoney, the Tax Policy Center estimates that federal spending would need to be cut by at least 20%. That would amount to more than 100% of defense spending, or 82% of domestic program spending, or 41% of Medicare and Social Security spending. As Donald Trump repeated in an interview with Fox Business, “I want security for this country.” Last time I checked cutting military funding and “security” don’t go hand in hand so what will happen if the U.S takes on this tremendous debt which I see as inevitable.
Since the U.S has consistently taken on a deficit year by year, they need to compensate for this to match their expenditure. America relies on foreign investment into its bond market to account for 50% of its debt. As the national debt of the U.S increases – making a U.S Treasury bond more ‘risky’- so does the interest rate on the bonds to keep attracting consumers to finance their deficit. Since interest rates on bonds serve as a benchmark for most consumer loans products – these include mortgages, loans, and credit cards – this means that the cost of living for the American will increase. Eventually, taxes will need to rise again, or federal spending will need to decrease to pay off the debt. This will lead to slower growth in the future and potentially lower standards of living. So even though Donald Trump will ensure the average American has a higher disposable income: the national debt in the U.S will rise to a point where taxes increase or federal spending will be cut and decrease American’s disposable income to where it was before Trump’s policies or even more likely worse off than before Trump’s policies.""So even though the U.S will be left in a potentially worse situation long term, at least, there’s no death tax!
Furthermore, Trump’s immigration policies will lower American productivity and will not even lower unemployment. According to the Business Insider, Donald Trump's plan is to “deport nearly 11 million” illegal immigrants while skipping any legal system or institution. This would mean a large outflux of people who are stimulating the economy and buying American goods. Trump believes that this mass deportation of Mexicans mainly will open up jobs for Americans. However, the contrary is uncovered when you take a deeper look at the real effects of his policies.
According to Doug Holtz-Eakin – president of American Action Forum – Trump’s plans “will harm the U.S economy” as he believes “immigration is a significant source of economic vitality.” Firstly, removing 11 million people that are well installed within the labor market will have several consequences for businesses that rely on cheap labor. Many of these immigrants are working low-skilled jobs that many Americans do not want to do. These jobs uphold undocumented immigrants hold the agriculture industry - 26% of all agricultural jobs - and prices of foods in America will significantly increase due to the contraction in supply. If these positions are filled, then wage increases will be demanded. Some of these immigrant’s jobs are on minimum wage of 7.25 USD, which may not be sufficient for the average American as they may see it better to claim an average welfare benefit of 25 USD a day than work a poor job. This is made even more complicated when Trump says that he wants to leave minimum wage “the way it is.” So either way, even if American’s take these jobs which is unlikely, prices for goods like food will increase regardless. This, in perspective, will counter the benefits of American’s having jobs and Donald’s tax policy of giving the consumer more money to buy more expensive products.
This immediately erases the phenomenon that ‘immigrants take American jobs’; this is rarely the case as they do jobs that are unoccupied by Americans. In fact, according to TheStreet.com, “each immigrant generates 1.2 local jobs”. This occurs because immediately on enter of the labor market, immigrants are looking for jobs with minor requirements as they are not as proficient with language and are are seeking to get into the market as fast as possible. They take jobs that work alongside American’s helping to boost production possibilities for companies and lowering prices for the American consumer. They also increase aggregate demand in an economy through spending. In 2010, undocumented immigrants accounted for 13 billion USD in tax revenues while only claiming 1 billion USD in benefits. From an economical point of view, it is a win-win situation for both the American Economy and the Immigrant.
Moreover, Trump’s trade policies will place American companies at large disadvantages. According to The Guardian, Donald Trump has called for a tariff on Chinese imports of around 25%. China is the third-largest consumer of goods produced in the United States and the leading exporter of goods to the United States, ahead of Canada. Trump’s tariff will lead to the Chinese placing counter tariffs on American and placing both countries at a disadvantage. Trump’s reasoning behind this is that America has lost many jobs to markets like China due to their labor being more competitive. These tariffs aim to keep companies producing in the US. However, a recent Ball State study found that “Had we continued 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”, This has occurred due to the increase in capital-intensive work. This means that Trump’s tariffs will not bring back jobs to the U.S as these jobs have been taken by machines. Considering that this plan is passed through and China place counter duties, this will effectively close off the U. S’s third largest export destination and reduce demand for American products significantly. This will force companies in the U.S, who rely on imports from China to go out of business due to the increase in the cost of production.
Furthermore, since 1980, the U.S. economy had grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. This shows that a trade deficit is not as bad as Trump makes it sound. The US imports well from China due to demand for cheap products in return for American dollars to the Chinese. The Chinese accept this payment and in return give products. At the end of the day, China has more money while the USA has more goods. This surplus of goods or money on both sides are equal to each other. This means at the end of trade both parties have the same value they started with. So from an economical point of view, it is a win-win situation for both sides. In my eyes, there is no such thing as a trade deficit if you break down the essence of trade between two countries and look at individuals the only reason these trades are happening is because they see it as beneficial to them. Each American firm trading with China by either getting goods or selling them is benefiting by either having access to cheap goods or access to a wider customer base. This makes business more profitable which would affect aggregate demand in a local economy by increasing it. Trade leads to growth, and that is the simple fact about it. So by Trump limiting trade with one of USA’s principal trading partners, he is mostly hurting the economy by limiting American business.
The tariff on Chinese goods will also damage the average Americans purchasing power. With all of Trump's policies, you believe that he wants to increase the purchasing power of most Americans even if the repercussion is 9.5 trillion USD. However, basic economics tells us that a tariff is not only an added price on importers, but it is also an added cost to consumers. Consumers will have to pay more for goods – such as clothes, electronics, and food – which will mean Americans will be worse off. If Trump passes this Tariff, it would essentially be a tax on goods from major retailers like Walmart. This would severely damage the American middle class which is exactly the opposite of what Trump wants and says will happen. Also, many American firms could switch production to other countries like India and Vietnam. Trump cannot place a Tariff on all goods coming in from abroad as this will cancel out his income tax policy altogether. This increase in price for both consumers and firms will lead to an economic slowdown due to a reduction in aggregate demand.
Trump’s economic policies have been set to seem beneficial to the American public, however, with a more in-depth analysis of the effects we can see that it will lead to an economic downturn. This will be due to an overall combination of American debt, low productivity, and less trade with China which will inevitably lead to lower economic activity in the long term.
Written by Rayyan Versi
Published on the 20th March 2016