Macroeconomic Impacts of Trump’s Political Policies

Macroeconomic Impacts of Trump’s Political Policies

            Introduction

Donald Trump throughout his campaign trail during the 2016 general elections highlighted various key sectors of the economy that his administration would prioritize for improvement. The Republican candidate outlined high unemployment rates, the negative U.S deficit, high taxation and exceptionally high government spending as the major areas his regime would target for improvement. Accordingly, Trump’s victory in the 2016 general elections marked a major debut in the U.S economic transition with controversial issues such as foreign affairs, civil rights, immigration and unemployment taking center stage. Trump’s commitment to improve the U.S domestic economy since he assumed office in late January 2017 is based largely on changing how the federal government conducts business and the manner it participates in international trade. In response to the current economic challenges, Trump is set to promote protectionism and the American economic independence policy by reforming the U.S domestic businesses, restructuring the country’s international debt and renegotiating the existing trade agreements. The reforms are in a bid to make U.S a true powerhouse it was in the past ten years.

  Impacts of Trump’s Political Policies on U.S Macroeconomics

Because Trump’s economic outlook seeks to reform business practices in the country, the impacts of his administration will be apparently reflected in consumption patterns, aggregate demand and price levels. One of the major policy changes that will affect the U.S consumers and consumption levels as well is the proposed 5 percent tariff on all imports including those from Mexico and 45 percent tariff on imports from China. Imposing such tariffs on imports will arguably result to more than 1% reduction in the growth of annual GPD and consequently significant decline in economic growth. Additionally, increasing tariffs will make imports of parts for most consumer products more expensive for domestic companies to import. As a consequence, companies will pass the high costs to American consumers by hiking prices of their products in order to remain profitable (Francis, 2016). According to the forces of demand and supply, higher price levels will reduce aggregate demand for consumer items causing many domestic companies and businesses to experience lower profit margins and possibly collapse. Second, political policies upheld by Trump’s administration will have substantial impacts on the country’s GDP. Trump proposed a tax plan that seeks to streamline the current tax plans by lowering marginal corporate as well as personal tax rates from 39.6% to 33%. The tax proposal is associated with various long-term economic benefits, particularly to the country’s GDP. First, the tax plans will promote savings and investment by reducing marginal tax rates imposed on investment by approximately 10%. Second, the tax proposals will boost economic growth by lowering the cost of equity financing of domestic investments relative to that of debt financing (Kaletsky, 2017). While these benefits might potentially improve the country’s GDP, there effectiveness in the next five to ten years will be offset by reduced government revenues, higher national debt and increased long-term interest rates. According to the nonpartisan Tax Policy Center, implementation of the new tax proposals will reduce government revenue earnings by over $9.5 trillion and increase the country’s national debt by over 85% of GDP within ten years of Trump’s regime. The other macroeconomic aspect that will experience remarkable transformations during Trump’s presidency is the foreign affairs, especially international trade. Trump’s administration seeks to reduce the country’s trade deficit of $500 billion by enforcing the border tax policy. According to the new administration’s perception, increasing tariffs and making imported items more expensive will strengthen the dollar and boost the country’s economic growth. However, this will apparently spark trade wars because other countries, especially trade partners will retaliate by enacting tariff policies that limit U.S imports. Moreover, Trump’s decision to address U.S’s trade deficit by renegotiating trade deals with the existing trade allies will negatively affect the country’s international trade and its aggregate economy will potentially plummet (FXCM Market Insights, 2016). For instance, Trump’s administration is considering withdrawing U.S from Paris Accord and the North American Fair Trade Agreement (NAFTA) as well as enforcing WTO regulations in an effort to restructure the country’s international trade deals. While the policies may add value to the U.S domestic companies, they will result to substantial economic decline by reducing markets for U.S exports in the trading regions (Pulselive Business Insider, 2017). The other immediate effects of Trump’s presidential tenure are higher interest rates. The policies proposed by Trump’s administration are set to lower tax margins, reduce immigrant employees and increase government spending on infrastructure development. In addition to the proposed trade protectionism policies, these measures will result to a dramatic increase in long-term interest rates and significant acceleration in inflation rates. As a result, financial markets will experience disruptive impact, especially when the Fed fails to tighten and regulate monetary policies to curb the accelerating inflation and increasingly high prices. Moreover, Trump’s political policies will have a substantial impact on immigration and employment in U.S. During his inauguration, Trump was categorical that his administration will endeavor to combat illegal migration as the most contentious issue in the country as regards unemployment rates. One of the strategies Trump cited was to construct a wall on the U.S-Mexico border to prevent undocumented workers from slipping into U.S to take American jobs. Trump also pledged to deport most of the foreign employees, especially undocumented workers to address the issue of unemployment. However, the protectionism policies do not guarantee U.S full employment and prosperity as Trump’s administration anticipates. This can be argued in light of the nature of the jibs. Undocumented workers occupy low end jobs that do not require advanced social and technical skills. Hence, such jobs will be replaced by automation and other innovative technologies in their absence. Additionally, because of their educational qualifications and skillsets, most of the native-born employees have orientations for high end white color jobs and will be unwilling to fill the job positions occupied by undocumented workers as Kaletsky (2017) notes. Finally, banking industry is yet another aspect of the macroeconomic environment that will be affected significantly by Trump’s economic policies. Trump’s administration is considering to repeal the Dodd-Frank Act of 2010 enacted in the wake of financial crisis that had struck the country. In essence, the primary aim of Dodd-Frank Act was to regulate banks by imposing the Volcker Rule, reserve requirements and federal restrictions or watchdogs on various banking operations such as lending. However, the act attracted considerable skepticism from vocal critics who perceived it as a complex means of addressing the crisis and termed its associated costs as the major cause of the financial crisis and troubled banks. This implies that Trump’s move to repeal the act will lift its associated bureaucracy costs and increase profitability in the banking industry by opening up new opportunities for revenue streams including lending and proprietary trading.    Additionally, Trump’s tax plan to reduce corporation tax by 20% will relieve banks of their tax burdens and ultimately improve their profit earnings. On the contrary, Trump’s policy on protectionism and immigration will dissuade cost-effective foreign talent as well as potential foreign investors and result to negative impacts on most banks in the banking industry (Adams, 2017).  

            Personal impressions and Lessons Learned

While different economic analysts have different outlook on the current and anticipated performance of U.S economy under Trump’s tenure, I think most their analyses and perspectives are influenced by their political affiliations. For instance, skeptics of Trump’s presidency perceive his government as a dysfunctional regime, while his supporters consider his administration as a potential for the country’s awaited prosperity and powerhouse. Like in any political system, Trump’s election was largely informed and compelled by his pledges to transform the country’s economy through new policy implementations. In general, based on the principles of economics, I think Trump’s administration should seek public opinions and insights from both local and international economists before enforcing most of their police proposals. Otherwise, implementing the policies as proposed will potentially disrupt the country’s economy and curtail its dreams for prosperity and world’s powerhouse. The key takeaway from this assignment as an economics student is that good international relations is inevitable in a country’s economic prosperity in today’s globalized economy. With the increasing globalization, there is need to deregulate cross-border trade barriers to expand foreign market and investment opportunities for domestic manufacturing companies rather than tightening trade tariffs as proposed by Trump’s administration.

References

Francis D. (2016, November 9). Trump?s Impact on the Economy: The Good, the Bad, and the    Ugly. Retrieved November 23, 2017, from http://foreignpolicy.com/2016/11/09/trumps-  impact-on-the-economy-the-good-the-bad-and-the-ugly/ FXCM Market Insights. (2016, November 23). How Will President Trump’s Policies Affect         Trade And Economics? Retrieved November 23, 2017, from      https://www.fxcm.com/insights/how-will-president-trumps-policies-affect-trade-and-       economics/ Pulselive Business Insider. (2017, April 1). Finance: Trump"s new tariff proposal could put the     economy on a path to "global recession". Retrieved November 23, 2017, from   http://www.pulselive.co.ke/bi/finance/finance-trumps-new-tariff-proposal-could-put-the-     economy-on-a-path-to-global-recession-id5937983.html. Adams D. (2017). How Trump's economic policies will impact the US and beyond | ICAEW        Economia. Retrieved November 23, 2017, from http://economia.icaew.com/en/features/july-2017/how-donald-trumps-economic-policies-      will-impact-the-us-and-beyond Kaletsky, A. (2017, July 14). 10 economic consequences of Donald Trump's election win.             Retrieved November 23, 2017, from https://www.theguardian.com/business/2016/nov/28/donald-trump-economic-        consequences-us-election-growth