Frustrated Americans await the economic changes they voted for with
Trump
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[November 09, 2024] By
PAUL WISEMAN
WASHINGTON (AP) — Fed up with high prices and unimpressed with an
economy that by just about any measure is a healthy one, Americans
demanded change when they voted for president.
They could get it.
President-elect Donald Trump has vowed to topple many of the Biden
administration's economic policies. Trump campaigned on promises to
impose huge tariffs on foreign goods, slash taxes on individuals and
businesses and deport millions of undocumented immigrants working in the
United States.
With their votes, tens of millions of Americans expressed their
confidence that Trump can restore the low prices and economic stability
they recall from his first term — at least until the COVID-19 recession
of 2020 paralyzed the economy and then a powerful recovery sent
inflation soaring. Inflation has since plummeted and is nearly back to
normal. Yet Americans are frustrated over still-high prices.
“His track record proved to be, on balance, positive, and people look
back now and think: ‘Oh, OK. Let’s try that again,’ ” said Douglas
Holtz-Eakin, a former White House economic adviser, director of the
Congressional Budget Office and now president of the conservative
American Action Forum think tank.
Since Election Day, the Dow Jones Industrial Average has skyrocketed
more than 1,700 points, largely on expectations that tax cuts and a
broad loosening of regulations will accelerate economic growth and swell
corporate profits.
Maybe they will. Yet many economists warn that Trump’s plans are likely
to worsen the inflation he’s vowed to eradicate, drive up the federal
debt and eventually slow growth.
Trump policies could boost inflation
The Peterson Institute for International Economics, a leading think
tank, has estimated that Trump’s policies would slash the U.S. gross
domestic product — the total output of goods and services — by between
$1.5 trillion and $6.4 trillion through 2028. Peterson also estimated
that Trump’s proposals would drive prices sharply higher within two
years: Inflation, which would otherwise come in at 1.9% in 2026, would
instead jump to between 6% and 9.3% if Trump’s policies were enacted in
full.
Last month, 23 Nobel-winning economists signed a letter warning that a
Trump administration “will lead to higher prices, larger deficits, and
greater inequality."
“Among the most important determinants of economic success,” they wrote,
"are the rule of law and economic and political certainty, and Trump
threatens all of these.’’
Trump is inheriting an economy that, despite frustratingly high prices,
looks fundamentally strong. Growth came in at a healthy 2.8% annual rate
from July through September. Unemployment is 4.1% — quite low by
historic standards.
Among wealthy countries, only Spain will experience faster growth this
year, according to the International Monetary Fund's forecast. The
United States is the economic “envy of the world," the Economist
magazine recently declared.
The Federal Reserve is so confident that U.S. inflation is slowing
toward its 2% target that it cut its benchmark rate in September and
again this week.
Americans are deeply unhappy with prices
Consumers, though, still bear the scars of the inflationary surge.
Prices on average are still 19% higher than they were before inflation
began to accelerate in 2021. Grocery bills and rent hikes are still
causing hardships, especially for lower-income households. Though
inflation-adjusted hourly wages have risen for more than two years,
they're still below where they were before President Joe Biden took
office.
Voters took their frustration to the polls. According to AP VoteCast, a
sweeping survey of more than 120,000 voters nationwide, 3 in 10 voters
said their family was “falling behind’’ financially, up from 2 in 10 in
2020. About 9 in 10 voters were at least somewhat worried about the cost
of groceries, 8 in 10 about the cost of healthcare, housing or gasoline.
“I don’t think it’s either deep or complicated,’’ Holtz-Eakin said. “The
real problem is the Biden-Harris team made people worse off, and they
were very angry about it, and we saw the result.’’
The irony is that mainstream economists fear Trump’s remedies will make
price levels worse, not better.
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People buy groceries at a Walmart Superstore in Secaucus, New
Jersey, July 11, 2024. (AP Photo/Eduardo Munoz Alvarez, File)
Tariffs are a tax on consumers
The centerpiece of Trump’s economic agenda is taxing imports. It's
an approach that he asserts will shrink America’s trade deficits and
force other countries to grant concessions to the United States. In
his first term, he increased tariffs on Chinese goods, and he’s now
promised much more of the same: Trump wants to raise tariffs on
Chinese goods to 60% and impose a “universal’’ tax of 10% or 20% on
all other imports.
Trump insists that other countries pay tariffs. In fact, American
companies pay them — and then typically pass along their higher
costs to their customers via higher prices. Which is why taxing
imports is normally inflationary. Worse, other countries usually
retaliate with tariffs on American goods, thereby hurting U.S.
exporters.
Kimberly Clausing and Mary Lovely of the Peterson Institute have
calculated that Trump’s proposed 60% tax on Chinese imports and his
high-end 20% tariff on everything else would impose an after-tax
loss on a typical American household of $2,600 annually.
The economic damage would likely spread globally. Researchers at
Capital Economics have calculated that a 10% U.S. tariff would hurt
Mexico hardest. Germany and China would also suffer. All of that
depends, of course, on whether he actually does what he said during
the campaign.
Deportations would rattle the US job market
Trump has threatened to deport millions of undocumented immigrants,
potentially undermining one of the factors that allowed the United
States to tame inflation without falling into recession.
The Congressional Budget Office reported that net immigration —
arrivals minus departures — reached 3.3 million in 2023. Employers
needed the new arrivals. After the economy rebounded from the
pandemic recession, companies struggled to hire enough workers,
especially because so many native-born baby boomers were retiring.
Immigrants filled the gap. Over the past four years, 73% of those
who entered the labor force were foreign born.
Economists Wendy Edelberg and Tara Watson of the Brookings
Institution’s Hamilton Project found that by raising the supply of
workers, the influx of immigrants allowed the United States to
generate jobs without overheating and accelerating inflation.
The Peterson Institute calculates that the deportation of all 8.3
million immigrants believed to be working illegally in the United
States would slash U.S. GDP by $5.1 trillion and raise inflation by
9.1 percentage points by 2028
Big tax cuts could swell the federal deficit
Trump has proposed extending 2017 tax cuts for individuals that were
set to expire after 2025 and restoring tax breaks for businesses
that were being reduced. He's also called for ending taxes on Social
Security benefits, overtime pay and tips as well as further reducing
the corporate income tax rate for U.S. manufacturers.
The University of Pennsylvania’s Penn Wharton Budget Model estimates
that Trump’s tax policies would i ncrease budget deficits by $5.8
trillion over 10 years. Even if the tax cuts generated enough growth
to recoup some of the lost tax revenue, Penn Wharton calculated,
deficits would still increase by more than $4.1 trillion from 2025
through 2034.
The federal budget is already out of balance. An aging population
has required increased spending on Social Security and Medicare. And
past tax cuts have shrunk government revenue.
Holtz-Eakin said he worries that Trump has little appetite for
taking the steps — cuts to Social Security and Medicare, tax
increases or some combination — needed to bring the federal budget
meaningfully closer to balance.
“It’s not going to happen," Holtz-Eakin said.
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