by Simon Johnson
Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.
WASHINGTON, DC – US President-elect Donald Trump is filling his cabinet with rich people. According to the latest count, his nominees include five billionaires and six multimillionaires. This is what is known as oligarchy: direct control of the state by people with substantial private economic power. Given that the Republicans also control both houses of Congress – and will soon make many judicial appointments – there is virtually no effective constraint on the executive branch.
In many instances – including the United States today – the initial reaction to such a government includes the hope that perhaps rich people will be good at creating jobs. They made themselves rich, goes the logic, so maybe they can do the same for the rest of us.
Hope usually dies last, but the incoming administration’s proposed economic policies are not encouraging. The organizing principle seems to be to discard pragmatism entirely and advance an extreme and discredited ideology.
The central theme of Trumponomics so far has been swift and sharp tax cuts. But Mick Mulvaney, Trump’s pick to run the Office of Management and Budget (OMB) is a prominent and articulate deficit hawk; he will have a hard time supporting measures that increase the national debt.
To some extent, tax cuts will be justified with overly optimistic projections regarding their impact on economic growth, as was done under President George W. Bush, with generally disastrous effects. But there is a limit to how much pressure can be put on the Congressional Budget Office, which is responsible for providing credible assessments of the fiscal impact of new policies.
Trump seems determined to lower income taxes for high-income Americans, as well as to reduce capital-gains tax (mostly paid by the well-off) and nearly eliminate corporate taxes (again, disproportionately benefiting the richest). To do this, his administration will seek to increase taxes on others, and now we are beginning to see what this will look like. People close to the president-elect are considering an import tariff, set at around 10%.
This tariff will undoubtedly be presented to the public as a move to make American manufacturing great again. But a tariff is just another name for a tax that increases the costs of all imported goods. This could help a few firms at the margin – and presumably Trump’s team will highlight news stories (real or fake) about a few hundred or even a few thousand jobs being “saved.”
But the cost per job will be high: all imports will become more expensive, and this increase in the price level will filter through to the cost of everything Americans buy. In effect, the oligarchs will reduce direct taxation on themselves and increase indirect taxation on everyone – much like increasing the sales tax on all goods. Under any such proposal, the burden of taxation would be shifted from the better off to those with less income and little or no wealth.
And that may be just the start of the negative impact on most Americans’ wellbeing. If Trump increases tariffs on imported goods, some or all of America’s trading partners will most likely retaliate, by imposing tariffs on US exports. As US export-oriented firms – many of which pay high wages – reduce output, relative to what they would have produced otherwise, the effect will presumably be to reduce the number of good jobs.
Some countries – such as China – may deploy other punitive measures against US firms operating on their territory. The net effect will again be to reduce employment, both worldwide and in the US. The world has had much experience with “trade wars,” and it has never been positive.
Why would a group of American oligarchs pursue such a disastrous policy? The Trump administration is taking shape as a coalition of businesspeople who wrongly believe that protectionism is a good way to help the economy and market fundamentalists who now dominate the Republican caucus in the US House of Representatives.
Before Trump’s rise to prominence, the House Republicans were developing a set of policies structured around deep tax cuts, sweeping deregulation (including for finance and the environment), and repeal of President Barack Obama’s signature health-care reform, the Affordable Care Act (“Obamacare”). They were, however, resolutely in favor of freer trade – and the Obama administration’s plan was to enact the Trans-Pacific Partnership (TPP), a free-trade agreement with 11 other Pacific Rim countries, with substantial Republican support in Congress.
Trump’s election has not changed the core House Republican agenda – in fact, it has brought that agenda’s architects into government, at OMB, at the Department of Health and Human Services, the CIA, and other prominent positions, with more likely to follow. As my colleague James Kwak explains in his new book Economism, their pro-market thinking has gone too far and is unlikely to lead to good outcomes.
Selling Trump’s signature issue – protectionism – to the House Republicans was not easy. But now that they have started to think about an import tariff as part of their tax “reform” package, they will all start to get on board. And they will offer various strange justifications that deflect attention from the essentials of their policy: lower taxes for the oligarchs and people like them, and higher taxes – not to mention significant losses of high-paying jobs – for almost everyone else.