President Trump frequently touts the strong economy as one of his great achievements, and he will likely do so again in his State of the Union address Tuesday. He should take credit while he can. Sure, he inherited an economy moving solidly down the tracks, but he is set to leave one that is headed off the rails.
Nearly a year ago, Trump pushed massive deficit-financed tax cuts through the Republican Congress that temporarily juiced up the economy. But they came at a steep cost. Businesses and wealthy households received a windfall, but the Treasury had to borrow hundreds of billions of dollars from global investors to cut the checks.
Growth now, as the stimulus wears off, has slowed to where it was prior to the tax cut. Trump’s argument that the corporate tax cuts would incent businesses to invest more and support sustainably stronger long-term growth looks more and more like a pipe dream. Corporations’ effective tax rate — the taxes they pay as a percent of their profits — was cut in half to an all-time low but has yet to unleash more investment.
The president also argued that the tax cuts would pay for themselves. Not even close. Tax revenues are plunging, and the nation’s budget deficit is ballooning. According to the Congressional Budget Office, the nonpartisan government agency that does the bean counting, if we don’t take a U-turn on the president’s tax and spending policies, our collective finances will end in a train wreck.
Trump’s trade war is also corrosive on the economy. Higher tariffs have cut into corporate profits — General Motors warned last summer that tariffs on imported cars and parts could force the company to cut jobs. In November it announced plans to close four US plants and cut thousands of jobs.
Businesses are nervous, unsure of whether the president’s next move is to lower the tariffs or raise them. That’s another reason business investment has flat-lined. The rest of the global economy is also suffering fallout from the trade war, which is blowing back on us. Just ask Apple and other technology companies about their overseas sales.
Yet, the president has nothing to show for all the trade drama. Consider the deal he struck with Canada and Mexico late last year — The United-States-Mexico-Canada Agreement — which made nothing more than a few tweaks to the existing North American Free Trade Agreement, or last summer’s handshake deal with the European Union that has to date led to no meaningful change in our trade relationship with the EU.
Trade negotiations with China appear headed to the same end. That is, after a lot of chest thumping, President Trump will ultimately agree to a face-saving, largely inconsequential trade deal with the Chinese. Getting China to play fairly in the global economy and stop its bad behavior over intellectual property rights, forced technology transfer, market access and cyber espionage will have to wait for another day and another approach.
Immigration reform will surely come up during President Trump’s address, but his immigration policy is economically wrong-headed. US businesses say their biggest problem is finding qualified workers. And with the large baby boom generation set to retire over the next decade, this will be a perennial problem. Our farmers, hotel and restaurant owners, and transportation and construction companies are struggling to fill a record number of job openings. If the president wants to build a border wall between the United States and Mexico, he will probably need to hire Mexicans to build it.
Our nation’s comparative economic advantage is that we innovate, and we do so in significant part because we have historically welcomed new people and their fresh ideas. We need more immigrants, not fewer. The president’s only chance of fulfilling his campaign promise of sustainably stronger economic growth is to open his arms to more immigrants.
The president’s disregard for rules (think tariffs) and organizations (think World Trade Organization) that for generations have powered enormous gains in our economy will end up doing the most economic damage. Indeed, we wrote the rules and built the organizations. They worked for us because the rest of the world trusted that we would still follow them, even if it wasn’t completely convenient for us to do so.
Correction: An earlier version of this article incorrectly stated that GM pointed to tariffs when it announced layoffs. In fact, it had separately warned that tariffs could hurt company profits.