Lee Ohanian is a professor of economics at UCLA and a senior fellow at the Hoover Institution at Stanford University. This op-ed appeared in the San Francisco Chronicle.
President-elect Donald Trump’s economic vision for America is an unprecedented and unlikely combination of economic policies from both the far left and the far right that he argues will right America’s economic ship. Trump claims that his policies of trade restrictions, immigration restrictions, tax cuts, and higher federal government spending will create 25 million new jobs and will nearly double the current economic growth rate over the next decade.
These policies have given hope to a large group of voters who blame globalization and government for declining economic opportunities and lower incomes that are affecting a growing number of Americans. But several of Trump’s policies provide nothing more than a false sense of hope, particularly to those workers who are the least skilled, and who are the most vulnerable to economic dislocations arising from globalization and technological change.
Trump’s trade proposals are viewed by many as a critical policy tool for turning back the tide of globalization and restoring high-paying U.S. jobs. Trump argues that existing trade policies have devastated the economic lives of many Americans. He proposes to renegotiate existing trade deals, and to raise tariffs on China if the Chinese do not stop what Trump calls unfair trade practices.
These proposals have resonated with a surging populist sentiment among voters, but they are perhaps the most destructive of Trump’s policies. The United States benefits enormously from international trade, which provides not only a much wider range of goods for Americans to purchase, but also benefits the average American household by about $10,000 per year from lower prices. Moreover, U.S. trade restrictions would not make our industries more competitive. For example, the U.S. has protected domestic sugar producers since 1789. After 200 years of protection, our sugar industry is nowhere close to being competitive, and it will never be competitive.
Today’s sugar protection raises domestic sugar prices about 60 percent above the world price. The Commerce Department estimates that three jobs are lost in the candy industry alone for every sugar job that is “saved” by protection. Moreover, hiking U.S. tariffs will raise the cost of the raw and intermediate imported goods that comprise our complex international supply chain. There is wide agreement among economists that raising trade protection could benefit a handful of workers, but will significantly reduce economic opportunities and incomes for everyone else.
Some of Trump’s proposals for tax reform are better. While lacking in detail, Trump proposes to eliminate many tax credits and subsidies, and reduce marginal tax rates. This view of tax policy is consistent with the recommendations of every bipartisan tax reform commission since the 1990s.
Unfortunately, these recommendations have never been followed. Today’s U.S. tax code is more than 700,000 pages long. The corporate tax code is the poster child of tax complexity and inefficiency. The U.S. 35 percent statutory corporate tax rate is among the highest in the world, yet corporate tax revenue accounts for only 10 percent of federal tax revenue.
In 2002, the IRS declared that corporate tax rules were so complicated that it was nearly impossible to summarize them. They are even more complicated today.
The Tax Foundation, a nonpartisan research center that analyzes the economic effects of taxation, concludes that the Trump plan would expand the economy by ultimately creating an additional two million jobs. However, they also find that his tax plan would decrease tax revenue by about $3 trillion over the next decade. This suggests that the federal deficit will rise, not only because of lower revenues, but because of Trump’s proposal to raise federal spending in a number of areas without offsetting spending cuts in other areas.
Moreover, Trump has not offered any proposal to deal with the looming imbalances of Social Security. This means that future Congresses and presidents may inherit a very large fiscal problem that will require more draconian changes in the future than what would be required now to address this issue.
Trump’s immigration plans make his goal of creating 25 million jobs virtually unattainable. Because of the accelerating retirement of workers from the Baby Boom generation, economists broadly agree that there is almost no chance the U.S. can create 25 million jobs in the next 10 years without considerable immigration.
Economists also agree that it is critical to increase the number of high-skilled immigrants, particularly immigrants who wish to start new businesses. Immigrant entrepreneurs disproportionately account for successful U.S. startups. More than half of successful high tech startups were founded or co-founded by immigrants, and about half of the Fortune 500 was founded either by an immigrant or by the child of an immigrant.
Restoring our entrepreneurship rate to its pre-Great Recession level is important for increasing economic growth, because a small share of today’s startups will become tomorrow’s economic giants. Raising high-skilled immigration is perhaps the closest economic policy akin to a “free lunch” for our country, as this would significantly increase new opportunities. However, Trump’s immigration proposals suggest that this will be unlikely.
U.S. economic growth is well below its historical average, and has been for some time. Trump’s policies may increase economic growth and job creation modestly, but they will not come close to achieving what he has advertised. Ironically, achieving his goals of doubling our economic growth rate and creating 25 million new jobs over the next decade will require policies that are an about-face from some of his most dearly held proposals.