Trumps Economic Policy Proposals Back to the Future? Bob Murphy - PowerPoint PPT Presentation

Trump’s Economic Policy Proposals Back to the Future? Bob Murphy Department of Economics Boston College

Figure 1 Macroeconomic Impact of Trump Policy Proposals, 10 Year Horizon Real GDP Growth Employment Increase CBO Baseline 2.0% per year 7 million With Trump Policies : Trump Economist 3.5% to 4.0% per year 25 million Tax Foundation 2.7% to 2.8% per year Tax Policy Center 1.8% to 2.2% per year

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Figure 3 Sources: Bureau of Economic Analysis, CBO August 2016 Baseline, CRFB calculations.

Figure 4 Sources: CBO August 2016 Baseline, CRFB calculations.

Figure 5 Trump Job Calculation Uses a Rule of Thumb: Every extra 1 percentage point of annual GDP growth = 1.2 million jobs So (3.5% - 2.0%)*(1.2 million)*(10 years) = 18 million extra jobs above a baseline • Implies an Okun’s Law much more generous than standard textbook versions • From supply side, if the extra growth was due to productivity gains, then would have no employment effect If we assume growth reaches 3.5% and if we ignore these two points, is the 18 million job number feasible from a labor market perspective?

Recently Asked Questions Figure 6 tion, continued declines in the participation rates Labor Force Participation Rate Percent of people with low skills, and incentives in the Af- 70 fordable Care Act that discourage participation. TRUMP Using Trump ’ s rule of thumb described above, we 65 computed the annual differences between Trump ’ s promised 3.5% GDP growth and GDP growth in the HISTORY / CBO CBO forecast, then applied to that difference an 60 extra 1.2 million jobs per percentage point of dif- ferential GDP growth to obtain a path of employ- ment consistent with Trump ’ s claim of an addition- 55 al 18 million jobs. Then, assuming the same unem- 1948 1958 1968 1978 1988 1998 2008 2018 ployment rate and working age population as in Source: Macroeconomic Advisers, LLC; CBO; BLS the CBO forecast, we computed the labor force and response of labor supply to changes in marginal participation rate required to accommodate the tax rates is predominantly among secondary and extra employment. The result is shown in the near- lower income workers that constitute only a por- by chart, which depicts the history of the participa- tion of the (potential) labor force, and that their tion rate and two separate projections. The lower response is relatively modest. In short, we consider of the two projections is the CBO ’ s. The higher of the rise in the participation rate implied by Trump ’ s the two projections is the participation rate con- figures as simply not credible. 2 sistent with the CBO projections of population and the unemployment rate but assuming an increase in employment of 25.7 million over the next dec- ade instead of the 7.7 million in the CBO forecast. Trump ’ s numbers suggest that, instead of falling as in the CBO projection, the participation rate will quickly reverse course and push up to 67%, the highest rate on record. 1 We do believe that, all else equal, lower marginal tax rates encourage an increase in labor supply. However, because Trump ’ s tax plan lowers average as well as marginal tax rates— that is, it is not “ revenue neutral ” — any positive “ substitution ef- fect ” on labor supply from lower tax rates would be at least partly offset by an “ income effect. ” Fur- thermore, our reading of the literature is that the 1 For data underlying this chart, contact 2 Of course the labor force increases through additional Prakken@macroadvisers.com. immigration, but Trump ’ s proposed policies are intend- ed to reduce the flow of immigrants entering the coun- try. We will publish a piece on this shortly. 2

How Would Clinton’s and Trump’s Policies Impact the Debt? – Clinton’s plan would slightly reduce deficits if we incorporated unspecified Clinton’s plans would add rump’s Details of both candidates’ plans can be found in our June report Figure 7 Ten-Year Change in Fiscal Components by Candidate Fig. 2: Ten-Year Change in Fiscal Metrics by Candidate (Trillions of Dollars) (Trillions of Dollars) Revenue Primary Spending Interest Surplus/Deficit (-) $3T $1.65 $1.50 $2T $0.70 $1T $0.05 $0T -$0.20 -$1T -$1.20 -$2T Clinton -$3T Trump -$4T -$5T -$5.30 -$6T -$5.80 -$7T Note: estimates rounded to the nearest $50 billion. Source: Committee for a Responsible Federal Budget Clinton’s plan would increase both spending and . Clinton’s Meanwhile, Trump’s plan would decrease both non axes imposed by the Affordable Care Act (“Obamacare”)

– – – Clinton’s ’s Figure 8 Debt Under Candidates’ Proposals O’N Fig. 1: Debt Under Central Estimate of Candidate s’ Proposals (Percent of GDP) (Percent of GDP) O’N 130% Current Law 120% Trump, Updated Trump, June 2016 110% 105% Clinton, Updated Clinton, June 2016 100% 90% 86% 80% 70% 60% 2010 2012 2014 2016 2018 2020 2022 2024 2026 Source: Committee for a Responsible Federal Budget ’

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Figure 10 Spending Cuts Needed Without Exempting Any Areas of the Budget Fig. 1: Spending Cuts Needed Without Exempting Any Areas of the Budget Balance the Budget Pay for Proposals Stabilize the Debt 25% 25% 20% 15% 14% 15% 11% 10% 5% 5% <0.5% 0% Clinton Trump Clinton Trump Clinton Trump Source: CRFB calculations based on CBO projections and each candidate’s official website.

Figure 11 Spending Cuts Needed if Exempting Social Security, Medicare, and Defense Fig. 2: Spending Cuts Needed if Exempting Social Security, Medicare, and Defense Balance the Budget Pay for Proposals Stabilize the Debt 80% 72% 70% 60% 50% 44% 36% 40% 30% 30% 20% 13% 10% 1% 0% Clinton Trump Clinton Trump Clinton Trump Source: CRFB calculations based on CBO projections and each candidate’s official website.

Figure 12 10-Year Revenue Loss from Trump Tax Plan: Static Dynamic Tax Foundation $4.4 to 5.9 Trillion $2.6 to 3.9 Trillion Table One: Tax Revenue Offset Under Trump Trade, Regulatory and Energy Policy Reforms Cumulative Federal Tax Revenue Increases (2017-2026, Nominal Dollars, Trillions) Trade Policy Reforms $1.740 Regulatory Policy Reforms $0.487 Energy Policy Reforms $0.147 Total $2.374 At $1.74 trillion, trade policy reforms provide the largest revenue gain. This is followed Source: Navarro and Ross (September 29, 2016)

Figure 13 Real Economic Growth Rate Needed (Annual Average Real GDP Growth) Fig. 4: Real Economic Growth Rate Needed (Annual Average Real GDP Growth) Balance the Budget Stabilize the Debt Pay for Proposals** 7% 6.1% 6% Current Projected Growth: 2.0% 5% 4.5% 4% 3.5% 3.0% 2.7% 3% 2.0%* 2% 1% 0% Clinton Trump Clinton Trump Clinton Trump Source: CRFB calculations based on dynamic feedback projections from Tax Foundation for revenue and CBO Source: CRFB calculations based on dynamic feedback projections from Tax Foundation for revenue and CBO for immigration reform and ACA repeal. 
 *Requires additional growth of less than 0.1 percent. 
 **Assumes growth sufficient to maintain currently law debt-to-GDP ratio of 86 percent by 2026, although nominal debt levels will still increase .

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Figure 17 Source: Federal Reserve Board 2016