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The Macroeconomic Consequences of Mr. Trump's Economic Policies

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The Macroeconomic Consequences of Mr. Trump's Economic Policies ANALYSIS The Macroeconomic Consequences of Mr. Trump’s Economic Policies Prepared by Introduction Mark Zandi [email protected] Chief Economist This paper assesses the macroeconomic consequences of presidential candidate Donald Trump’s proposed economic policies. These include his policies on taxes and government Chris Lafakis [email protected] spending, immigration, and international trade. A similar analysis of candidate Hillary Director Clinton’s proposed economic policies will be forthcoming. Dan White [email protected] Senior Economist Adam Ozimek [email protected] Economist Contact Us Email [email protected] U.S./Canada +1.866.275.3266 EMEA +44.20.7772.5454 (London) +420.224.222.929 (Prague) Asia/Pacific +852.3551.3077 All Others +1.610.235.5299 Web www.economy.com www.moodysanalytics.com MOODY’S ANALYTICS The Macroeconomic Consequences of Mr. Trump’s Economic Policies1 BY MARK ZANDI, CHRIS LAFAKIS, DAN WHITE AND ADAM OZIMEK2 his paper assesses the macroeconomic consequences of presidential candidate Donald Trump’s proposed economic policies. These include his policies on taxes and government spending, immigration, and T international trade. A similar analysis of candidate Hillary Clinton’s proposed economic policies will be forthcoming. Three scenarios are considered. First, we and monetary policies implemented during and immigration, foreign direct investment take Mr. Trump’s proposals at face value as the financial crisis and many of the economic will also be reduced. While globalization has outlined on his campaign’s web site and in policies proposed by presidential candidates created winners and losers in the U.S. econ- his speeches and interviews. The second sce- in other elections. omy in recent decades, it contributes sub- nario assumes that Mr. Trump’s policies are Quantifying Mr. Trump’s economic poli- stantially to the ongoing growth of the U.S. fully adopted, but on a smaller scale than he cies is complicated by their lack of specificity. economy. Pulling back from globalization, has proposed. The third scenario assumes a The publicly available information is not suf- as Mr. Trump is proposing, will thus diminish President Trump will need to negotiate with ficient to fully quantify all of his proposals. the nation’s growth prospects. a somewhat skeptical Congress, resulting in Thus, a number of assumptions are laid out Mr. Trump’s economic proposals will also his policies being scaled back and adjusted in the paper. The assumptions are our own, result in larger federal government deficits in response to political realities. This final but they are based on discussions with some and a heavier debt load. His personal and scenario would be a reasonable baseline, or of those working on economic policy for the corporate tax cuts are massive and his pro- most likely scenario, were Mr. Trump to win Trump campaign. posals to expand spending on veterans and the election. To determine the long-term economic the military are significant. Given hisstated Mr. Trump has brought up other poten- impact of the candidate’s policy proposals, the opposition to changing entitlement pro- tially relevant economic policies that are not Moody’s Analytics model is simulated over grams such as Social Security and Medicare, included here since either their macroeco- the decade through 2026. This is also consis- this mix of much lower tax revenues and few nomic impact is too small or they are at this tent with the Congressional Budget Office’s cuts in spending can only be financed by sub- point not sufficiently developed to quantify. horizon for the federal government’s budget stantially more government borrowing. These include, for example, his recent energy and policy analysis. The assumption is that Driven largely by these factors, the policy proposals, his seeming support for Mr. Trump’s policies are implemented during economy will be significantly weaker if Mr. higher state-level minimum wages, and his his first term and not changed through the Trump’s economic proposals are adopted. ruminations on negotiating with investors in remainder of the decade, and no other signifi- Under the scenario in which all his stated U.S. Treasury bonds and on bringing back the cant fiscal policy changes are legislated. Feder- policies become law in the manner proposed, gold standard.3 al Reserve policy is determined by the model the economy suffers a lengthy recession and We use the Moody’s Analytics4 model in response to job market conditions, inflation, is smaller at the end of his four-year term of the U.S. economy for this analysis.5 The and financial market conditions, which will be than when he took office (see Chart). By the model is similar to that of the Federal Re- impacted by Mr. Trump’s policies. end of his presidency, there are close to 3.5 serve Board and Congressional Budget Of- Broadly, Mr. Trump’s economic proposals million fewer jobs and the unemployment fice for forecasting, budgeting and policy will result in a more isolated U.S. economy. rate rises to as high as 7%, compared with analysis. The Moody’s Analytics model has Cross-border trade and immigration will be below 5% today. During Mr. Trump’s presi- been used to evaluate the plethora of fiscal significantly diminished, and with less trade dency, the average American household’s af- 1 JUNE 2016 MOODY’S ANALYTICS ter-inflation income will stagnate, and stock would be felt by Macroeconomic Impact of Trump’s Policies prices and real house values will decline. all households. Real GDP, 2009$ tril Under the scenarios in which Congress Even allowing for 21.0 significantly waters down his policy propos- some variability in 20.5 No change in economic policy Full adoption of Trump's economic policies als, the economy will not suffer as much, the accuracy of the 20.0 but would still be diminished compared with economic model- 19.5 what it would have been with no change in ing and underlying 19.0 economic policies. assumptions that 18.5 Those who would benefit most from drive the analysis, 18.0 Mr. Trump’s economic proposals are high- four basic conclu- 17.5 income households. Everyone receives a tax sions regarding the 17.0 cut under his proposals, but the bulk of the impact of Mr. Trump’s 16.5 16 17 18 19 20 21 22 23 24 25 26 cuts would go to those at the very top of economic proposals the income distribution, and the job losses can be reached: 1) Sources: BEA, Moody’s Analytics resulting from his other policies would likely they will result in a 1 hit lower- and middle-income households less global U.S. economy; 2) they will lead to households; and 4) they will result in a the hardest. The decline in wealth caused larger government deficits and more debt; weaker U.S. economy, with fewer jobs and by weaker stock prices and housing values 3) they will largely benefit very high-income higher unemployment. On taxes and spending Mr. Trump has proposed a complete over- » Reducing the corporate tax rate to How or whether the Trump tax cuts will haul of the tax code and a massive reduction 15% from its current 35%. be paid for is also unclear. To fully pay for the in the taxes paid by both individuals and » Pass-through businesses such as S- cuts and not add to the federal budget deficit, corporations. Broadly, his tax plan would sig- corporations and partnerships also government spending must be reduced by nificantly lower marginal rates, make the tax only pay no more than 15%. 20%. However, except for his references to code flatter and less progressive, and scale » One-time repatriation tax of 10% of eliminating waste in government and block- back deductions and other tax breaks. More corporate profits held overseas. granting Medicaid, the candidate has not pro- specifically, the most significant proposed » Foreign subsidiaries of U.S. companies posed any other spending reductions. Instead, tax changes for individuals include: pay taxes on profits in the year they he has proposed more spending on veterans’ » Replacing the current seven personal are earned. healthcare, suggested that spending on the income tax brackets with three and » Repealing most tax breaks for military should increase, and intimated that reducing the top marginal rate from businesses and the corporate there should be no changes to Social Security 39.6% to 25%. minimum tax. and Medicare spending. Mr. Trump’s stance » Increasing the standard deduction to Mr. Trump’s tax plan is similar to other on immigration, including building a wall be- $25,000 for single filers and $50,000 recent tax reform proposals put forward by tween the U.S. and Mexico and significantly for joint filers, and indexing to the Republican Congress and the Obama increasing outlays on immigration officers, inflation thereafter. administration, in that all these plans lower may also be very costly to the government. » Taxing capital gains and dividends at a tax rates, close loopholes, and scale back Mr. Trump’s tax plan will make the tax 20% maximum rate. deductions and breaks in the code. However, code simpler than the status quo, but creates » Eliminating federal estate and gift taxes. the scale of the changes Mr. Trump is pro- complications. Fewer deductions and breaks » Eliminating the tax on investment posing is many times larger. According to an in the code will simplify things substantially, income of high-income households to analysis by the Tax Policy Center, the static as will eliminating alternative minimum help pay for the Affordable Care Act. cost of his tax proposals—not accounting for taxes. However, allowing pass-through busi- » Taxing carried interest as ordinary the impact of the proposals on the economy nesses, which are currently taxed at personal business income.
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