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

Figure 2

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?

Figure 6

Recently Asked Questions

2

tion, continued declines in the participation rates

• f people with low skills, and incentives in the Af-

fordable Care Act that discourage participation. Using Trump’s rule of thumb described above, we computed the annual differences between Trump’s promised 3.5% GDP growth and GDP growth in the CBO forecast, then applied to that difference an 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- al 18 million jobs. Then, assuming the same unem- ployment rate and working age population as in the CBO forecast, we computed the labor force and participation rate required to accommodate the extra employment. The result is shown in the near- by chart, which depicts the history of the participa- tion rate and two separate projections. The lower

• f the two projections is the CBO’s. The higher of

the two projections is the participation rate con- 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 response of labor supply to changes in marginal tax rates is predominantly among secondary and lower income workers that constitute only a por- tion of the (potential) labor force, and that their response is relatively modest. In short, we consider the rise in the participation rate implied by Trump’s figures as simply not credible.2

55 60 65 70 1948 1958 1968 1978 1988 1998 2008 2018

Source: Macroeconomic Advisers, LLC; CBO; BLS

Labor Force Participation Rate

Percent HISTORY / CBO TRUMP

2 Of course the labor force increases through additional

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.

1 For data underlying this chart, contact

Prakken@macroadvisers.com.

Figure 7

Ten-Year Change in Fiscal Components by Candidate

(Trillions of Dollars)

Source: Committee for a Responsible Federal Budget

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

• Fig. 2: Ten-Year Change in Fiscal Metrics by Candidate (Trillions of Dollars)

Note: estimates rounded to the nearest $50 billion.

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”) $1.50 $1.65 $0.05

• $0.20
• $5.80
• $1.20

$0.70

• $5.30
• $7T
• $6T
• $5T
• $4T
• $3T
• $2T
• $1T

$0T $1T $2T $3T Revenue Primary Spending Interest Surplus/Deficit (-)

Clinton Trump

Figure 8

Debt Under Candidates’ Proposals

(Percent of GDP)

Source: Committee for a Responsible Federal Budget

O’N O’N

– – – Clinton’s ’s

• Fig. 1: Debt Under Central Estimate of Candidates’ Proposals (Percent of GDP)

’ 60% 70% 80% 90% 100% 110% 120% 130% 2010 2012 2014 2016 2018 2020 2022 2024 2026 Current Law Trump, Updated Trump, June 2016 Clinton, Updated Clinton, June 2016

105% 86%

Figure 9

Figure 10

Spending Cuts Needed Without Exempting Any Areas of the Budget

• Fig. 1: Spending Cuts Needed Without Exempting Any Areas of the Budget

Source: CRFB calculations based on CBO projections and each candidate’s official website.

<0.5% 11% 5% 15% 14% 25% 0% 5% 10% 15% 20% 25% Clinton Trump Clinton Trump Clinton Trump

Pay for Proposals Stabilize the Debt Balance the Budget

Figure 11

Spending Cuts Needed if Exempting Social Security, Medicare, and Defense

• Fig. 2: Spending Cuts Needed if Exempting Social Security, Medicare, and Defense

Source: CRFB calculations based on CBO projections and each candidate’s official website.

1% 30% 13% 44% 36% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% Clinton Trump Clinton Trump Clinton Trump

Pay for Proposals Stabilize the Debt Balance the Budget

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 Source: Navarro and Ross (September 29, 2016)

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

Figure 13

Real Economic Growth Rate Needed

(Annual Average Real GDP Growth)

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.

• Fig. 4: Real Economic Growth Rate Needed (Annual Average Real GDP Growth)

Source: CRFB calculations based on dynamic feedback projections from Tax Foundation for revenue and CBO

2.0%* 3.0% 2.7% 3.5% 4.5% 6.1%

0% 1% 2% 3% 4% 5% 6% 7% Clinton Trump Clinton Trump Clinton Trump

Pay for Proposals** Stabilize the Debt Balance the Budget Current Projected Growth: 2.0%

Figure 14

Figure 15

Figure 16

Figure 17

Source: Federal Reserve Board 2016