Trump Economic Proposals during 2024
Donald Trump has proposed a wide range of economic policies during his quest to be re-elected. It is hard to know which of these to take seriously and which were just campaign rhetoric. (The same could also be said for Kamala Harris.) For now, I think we need to assume that he was serious about all of them and evaluate their consequences. It appears that he is likely to have a Republican Senate and House. You might think that the filibuster rule will prevent some of his proposals from becoming law, but many of them can be passed through reconciliation which is not subject to the filibuster rule. In addition, Trump has argued in the past that Republicans should dispense with the filibuster rule, if they get the chance. He also has considerable latitude as President to pursue some of these policies without congressional approval. He also transformed the Supreme Court during his first term in office and is likely to face a sympathetic audience there, if there are conflicts about the range of his authority.
Tax Policy
Trump has proposed a number of tax cuts which include excluding tip income, overtime pay, and Social Security income from taxation. He has also suggested removing the cap on deductions for State and Local income taxes, a move that is not popular within his own party. He would like to extend those portions of his 2017 tax cuts that are about to expire and he hopes to further reduce corporate income taxes. He plans to replace the lost revenue from these tax cuts with increased revenue from across the board tariffs of 10% to 20% on all imports and 60% tariffs on imports from China.
Immigration
Illegal Immigration
Trump has proposed a mass deportation of all illegal immigrants. His own VP, JD Vance, has attempted to “sane wash” this proposal by suggesting that they would start with those who have criminal records. It is certainly the case that the federal government does not have the manpower or the facilities to round up, detain, and process 10 to 15 million people (Trump claims it is 20 million). Trump has suggested using the U.S. military to assist in this mass deportation. My own view is that this violates the 1878 Posse Comitatus law prohibiting the use of the military to enforce domestic law, but this Supreme Court might disagree. In any case, that law does not restrict the use of the State National Guard units with the consent of the governor in question. This clearly poses a problem for Trump in California and New Mexico, but not so much in Texas. Trump may also face resistance from the home countries of illegal immigrants that may refuse to accept them back. In that case, Trump would have to fund and create long-term detainment facilities. Putting aside all of the logistical and humanitarian aspects of mass deportation, it has major economic consequences. The construction, agriculture, and home care sectors are heavily reliant on this labor force.
Legal Immigration
Trump also appears, based on his previous administration and rhetoric, to be unsympathetic to legal immigration. This has major consequences for the technology, finance, and medical sectors.
Outsourcing
Trump appears to oppose the technological outsourcing of labor, although this conclusion requires some reading between the lines. If you restrict imports, reduce the labor force through significant deportation, and restrict technological outsourcing, you will definitely raise domestic wages and prices. There will be some winners here, but the American consumer will almost certainly be worse off and the economic growth rate in the U.S. will decline.
Inflation
None of the above policies have to increase inflation. As Milton Friedman said, inflation is “always and everywhere a monetary phenomenon.” This requires some explanation. It does not mean that price shocks like the pandemic supply disruptions or aggressive fiscal policy play no role in igniting inflation. It does mean that if the central bank, or in the case of the U.S. the Federal Reserve Board (Fed), chooses to, it can prevent these factors from causing sustained inflation by restricting the rate of growth of the money supply and raising interest rates. In general, these shocks “cause” sustained inflation only if the Fed accommodates them with loose monetary policy. This is what happened in the mid 1970s following the oil price shocks and in 2020-2021, as we began to emerge from Covid.
Donald Trump has said that he wants to play a role in setting monetary policy. Political involvement in monetary policy generally means looser monetary policy. In the presence of the supply side constraints and the fiscal stimulus from tax cuts mentioned above, we are likely to see significantly higher inflation. How high the inflation gets depends on how far he pushes these agenda items.
The one thing that could mitigate the inflationary impact of these proposals is the revenue raising impacts of the tariffs. This will offset the fiscal stimulative effects of the tax cuts. There are many negative consequences to the tariffs, but in this context they help soften the impact of the tax cuts on inflation.
Do you have a different perspective or something to add? If so, please leave a comment below.