Donald Trump, the 45th president of America, promised to place extra emphasis on economic growth when he is sworn in as president. He said, “We have a great economic plan. We will double our growth and have the strongest economy anywhere in the world.” The president elect promised many other things including massive infrastructure spending, tearing up trade agreements and huge tax cuts among other things. The election of Donald Trump is likely to have far-reaching consequences on the economy, with all the proposed bold moves. It is going to affect the way business is done and this paper aims to look at some of these ways.
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Taxes
President Trump intends to slash taxes for households by combining all seven tax brackets into three. The top tax rate would come down to 33% from 39.6% (Davidson, Paul). The tax cuts are quite significant with an average of $1,000 for the middle income earners and $110 for the low income people. The repercussions of this is that Americans will end up paying less in the way of tax. When the amount of tax paid is decreased, people will have more money left over and it will likely go to consumer spending. Consumer spending is a key driver of the American economy, making up about 70% of economic activity (Davidson, Paul).
Apart from personal taxes, corporate taxes are also going to decrease from 35% to 15%. It is likely going to attract more multinationals to invest in the country due to the favorable tax regime. Tax revenue, based on the massive cuts, is going to decrease by $6.2 trillion over the next ten years (Moody’s Analytics Inc. 2). However, the Trump administration believes that shortfall will be covered by new revenue emanating from tax cuts and a new vibrant economy. Only a third of the proposed cuts are likely to be endorsed by congress but the deficits are likely to increase alongside the interest rates leading to a decrease in borrowing and general economic activity. Businesses are going to borrow less with increased interest and hence operations management are likely to be affected in a negative manner.
Trade
China have been making deliberate attempts to lower the value of the yuan and it has led to an increase in its exports while U.S. shipments to China have taken a tumble. Trump threatened to place high tariffs of 45% on all Chinese imports so as to discourage Americans from accessing them (Davidson, Paul). Placing the tariffs means that Chinese products are likely to become more expensive and hence people will shy away from them. The issue with this approach is that other countries, like China, are likely to respond in kind and place inhibitory tariff levels on American exports to their countries. It will make American exports very expensive and hence not attractive to the consumer.
The main idea behind president Trump’s changes in trade agreements is to ensure America becomes a manufacturing powerhouse in the world. Most manufacturers prefer to outsource labor to countries where it is cheaper such as China, Mexico or India. Outsourcing of labor robs Americans of the many employment opportunities and Trump plans on coaxing many manufacturers to bring back their operations to the United States (“The Economic Consequences Of Donald Trump”). Trump may succeed in reducing the offshoring but the trade tariffs are unlikely to outweigh other benefits like the lower wages and taxes overseas. Most supply chain operations are likely to be downstream since not many manufacturers are going to remove their operations from overseas, where they receive higher profit margins.
Immigrant Workers
Trump has been very vocal about his intention to deport undocumented immigrants by the millions and build a wall running along the Mexican border. The undocumented workers account for roughly 5% of the entire labor force in the U.S. and deporting them would end up creating a void and make it more difficult for employers to get access to workers (Moody’s Analytics Inc. 3). Most immigrants are employed in the manual and other labor intensive jobs that are low-paying and most Americans shy away from them. Deporting such workers would result into many jobs going unfulfilled and thus curtailing the economic output. Tightening the labor market would lead to an increase in wages for U.S. workers but the corporates would experience a decrease in corporate margins. Deporting workers will be detrimental to the economy and many supply chain activities are likely to be affected since production will be hampered. Operations management will be curtailed when there is a void in the labor force.
Infrastructure
The president has unveiled an infrastructure plan to the tune of $1 trillion that is going to add nothing to the deficit, according to Peter Navarro and Wilbur Ross who are his advisors. Private funds will invest $167 billion that would mainly be funded by Congress approved tax credits. The other part will be debt funded thanks to the lowered interest rates. In theory, a more vibrant economy will be able to pay for the tax credits. According to Trump, investing in infrastructure will end up creating 13 million jobs for the American people while improving production due to the more efficient transport infrastructure. A better transport infrastructure will result in increased efficiency in operations management since companies will have the ability to transport raw materials and finished goods faster and at a cheaper price. Investing in infrastructure like the proposed new pipelines will improve the reliability of energy that powers the nation’s industries
Energy
Pioneer Natural Resources CEO, Scott Sheffield, has suggested that Trump would improve America’s stagnant drilling boom if he makes it easier to build pipelines and thus unlock areas that are rich in oil and gas (Mann, Ted et al.). There are expectations that the president will clear the path for the new pipelines while he also ends the participation of the U.S. in global climate change pacts. The president is also expected to undo several environmental regulations so as to boost coal mining in America. Harold Hamm, CEO of Continental Resources, is the president’s chief advisor on matters energy (Mann, Ted et al.). He has suggested the scrapping off of renewable energy subsidies like solar and wind and credits for electric cars. Trump aims at improving the energy production of America with disregard for the environmental impact. It may result in cheaper energy for companies operating in the country but it would take a toll on the environment. Removing subsidies for renewable energy will drive up energy prices but the investment in pipelines and coal is likely to counterbalance the increased prices. High energy prices have been eating away at the profit margins of huge manufacturing companies and the proposals suggested by Trump are likely to lower the energy cost. It will make production cheaper thus reducing inconsistencies in the supply chain.
Economic Impact
There will be no change in employment over the first two years according to the proposals suggested by Trump. In this scenario, absorbing the growth of the working age population is not quite enough causing unemployment to rise to almost 6%. Economic growth will also be hampered in the long-run. The growth of GDP is estimated to be at a rate of 1.7% per year with the new policies whereas it currently stands at 2.0% with the current policies. Projections show that real GDP, in 2026, will stand at roughly $19.7 trillion with the proposed laws and $20.5 trillion with the current laws (Moody’s Analytics Inc. 9) . There are some long term economic benefits coming from the lowered marginal tax rates and adopting a corporate tax system that is territorial. However, these changes are too small to impact growth in a significant way.
Conclusion
It is evident that Trumps wants America to be a powerhouse in manufacturing so as to compete with the current giants like China. He has proposed some very bold moves such as the tax cuts and the threat to alter change agreements and increase tariffs on Chinese and Mexican imports. All efforts are aimed at encouraging manufacturers to maintain their businesses in America by offering them incentives and access to cheap energy and state of the art infrastructure. Presidential candidates often suggest proposals that are politically inclined as much as they are firm policy positions. His suggestions are fiscally unsound, such as the spending and tax cut proposals, and are likely to result in huge deficits and a high debt load. There is a huge discrepancy between what the president proposes and what it will actually take to make the arithmetic of the budget work. Most of the policies proposed by Trump point towards a diminished and more isolated American economy.
WORKS CITED
Davidson, Paul. “The Macroeconomic Consequences of Mr. Trump’s Economic Policies”. USA Today, 2016, http://www.usatoday.com/story/money/2016/11/09/economy-according-president-elect-trump/93528452/.
Mann, Ted et al. “Companies Weigh Impact Of Donald Trump’S Win”. Wall Street Journal, 2016, http://www.wsj.com/articles/businesses-world-wide-face-uncertainty-in-wake-of-trump-victory-1478705371.
Moody’s Analytics Inc.,. The Macroeconomic Consequences Of Mr. Trump’S Economic Policies. 2016, pp. 1-15, https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf.
“The Economic Consequences Of Donald Trump”. The Economist, 2016, http://www.economist.com/blogs/freeexchange/2016/11/global-economy.
