Next year is likely to bring widespread changes to federal economic policy. When it comes to evaluating the impact of these, the devil is usually in the details. Not so in this instance, and that makes the first months of a Donald Trump Administration most fascinating.
To begin, it is useful to understand that economists have a good grasp on impacts of single, discrete policy changes. Change a tax rate by 10 percent, and we can usually give good predictions of its effects.
This is due to a number of natural experiments from which to draw empirical lessons. However, there is far less available experience with widespread, nearly simultaneous policy changes, and that is where we are likely to be in 2017.
It seems probable to me that big changes can make a noticeable impact on growth. There are two reasons for this. First, it is likely that much of the slow growth of today’s economy is caused by hundreds of small factors that individually wouldn’t keep growth at historically low levels. This ‘death by a thousand cuts’ drag on the economy could be quickly remedied through simple administrative steps.
Second, tax cut proposals by the administration could have a relatively quick impact.
Combine these steps with a swift restructuring or elimination of many federal agencies, modest infrastructure spending and promise of fundamental reforms in our long-term debt, and we have many of the ingredients for a much more rapidly growing economy.
It is worth noting that even the economic scion of the left, Paul Krugman, admits this is possible. But, he does so suggesting short-term growth would be at the expense of long-term well-being.
I am far more optimistic since I think a period of more rapid growth would give the next administration breathing room to tackle a host of other economic challenges.
Without fundamental reforms, our growing crisis in entitlement spending will cause a widespread economic disaster. We cannot tax ourselves out of this dilemma, and persistent slow growth will render the problem far worse than it is now. Almost any remedy will be better than none at all, and that should be the focus of Congress by the start of summer.
Still, there are many obstacles to success, wholly independent from the political atmosphere. If Trump’s policy matches rhetoric, we risk a major trade war.
The first result of that would be a deep recession that will hit the exporting Midwest very hard. Moreover, any plans that add substantially to the deficit risk an increase in market interest rates. This will dampen growth no matter what steps the Federal Reserve takes. Market discipline cannot be voted away.
Further, if Trump’s tax plan leads to capital inflows, the trade imbalance will grow. With foreign tax havens holding some $1.4 trillion, a quick return could cause our trade deficit to more than double. The arithmetic on this is resolute and unbending.
So, in 2017, there is the potential for radical changes to the role of the federal government in our economy. This is clearly what most voters asked for in this election. After 25 years of growing government control of the economy, we should all welcome change.
Michael J. Hicks is the director of the Center for Business and Economic Research and an associate professor of economics in the Miller College of Business at Ball State University. Send comments to [email protected]