How Trump can delay a recession and raise incomes for Americans
© Getty Images

Last October, mulling over the economic environment the next president would face, I sent Hillary ClintonHillary Diane Rodham ClintonTrump's economic approval takes hit in battleground states: poll This is how Democrats will ensure Trump's re-election The Hill's Morning Report - Trump takes 2020 roadshow to New Mexico MORE memos on how she should provide some stimulus to sustain the current expansion and raise incomes by boosting business investment and productivity.

Alas, she did not become president — but that didn’t change our current economic challenges. To be sure, President Trump’s manifold troubles may preclude Congress from doing anything meaningful until after the 2018 elections. But if that’s not the case, here’s some advice for both sides.

ADVERTISEMENT

The White House, above all, should appreciate the stakes: without some form of serious stimulus, the U.S. economy almost certainly will slip into recession well before 2020. From Trump’s recent statements about “priming the pump,” he already understands that the eight-year-old expansion needs a boost.

 

The GOP plan for sweeping tax cuts won’t work here, even if it could pass Congress. To begin, it devotes most of its resources to high-income people and shareholders, who will just save most of their tax savings. More important, the plan would vastly expand federal deficits on a permanent basis. If that happens, the Federal Reserve almost certainly will hike interest rates considerably higher and faster than they now contemplate, and those rate hikes would likely end the expansion.

Washington needs to prime the pump in a way that directly supports employment over the next two years and carries no long-term costs for the deficit. As it happens, Trump — and Democrats — already support a reasonable way to do just that: enact a large, two-year increase in public investments in infrastructure.

But the plan will attract Democratic support only if Trump gives up the idea of using tax breaks to leverage private investment in new infrastructure projects. Democrats won’t (and shouldn’t) go along because that approach tilts the program towards infrastructure projects in high-income areas that can generate strong profits for its investors.

I assume that the president’s economic advisors also have briefed him on the recent, serious slowdown in business investment and productivity growth. Unless Trump addresses those problems as well, most Americans will make little income progress. The challenge here is to focus on changes that will boost business investment in a way that strengthens productivity and to do it without raising deficits on a permanent basis.

One approach that congressional Republicans and some Democrats could support entails allowing businesses to “expense” their investments in equipment — that is, deduct the entire cost in the year they purchase the equipment. This change focuses on equipment investments, which have the greatest impact on growth and productivity. The catch is that this approach still costs the Treasury many tens of billions of dollars per year, especially if it covers both corporations and privately-held businesses (like the Trump Organization), as it should.

Trump could draw some support for the plan from congressional Democrats by insisting that Wall Street pay for it. First, he could deliver on his campaign promise to end the notorious “carried interest” loophole that lets the managers of private equity, venture capital and hedge funds use the capital gains tax rate to shelter most of their income from their funds. Fund managers certainly can afford to pay the regular income tax like the rest of us. In 2016, the top 25 hedge fund managers altogether earned $11 billion, or an average of $440 million each.

To pay for the rest of equipment expensing, Trump should support the call by many Democrats for a small tax on financial transactions – three one-hundredths of one percent of the value of all stock, bond, and derivative purchases should do it. (Stock and bond IPOs and currency transactions would be exempt.) Wall Street will howl in protest — music to most Americans’ ears — but the economics are sound. On the plus side, the tax would reduce market volatility by discouraging short-term speculation and ending most high-frequency computer trading.

Moreover, today’s short-term speculators and high-frequency traders will have to invest those resources in more productive ways. The negative is that the tax would raise transaction costs and thus dampen investment on the margins. But since the tax would finance a serious reduction in the cost of business investments in equipment, the overall impact on the markets will be positive.

This plan is far from the dream agenda of either party. A Hillary Clinton presidency would have included many other measures to boost productivity and incomes, from access to tuition-free college for young people and greater access to bank loans for new businesses, to broad retraining opportunities for adults and a path to citizenship to expand job opportunities for immigrants.

For their part, congressional Republicans still believe in their trinity of huge tax cuts, drastic deregulation, and deep cutbacks in Medicare, Medicaid, and ObamaCare benefits. But the economics of stimulating an aging expansion and restoring business investment are nonpartisan, and both parties should have an interest in reviving income progress for most Americans.

For Trump, this plan has three simple parts consistent with his positions: increase public infrastructure investments, lower the cost of business investments, and make Wall Street pay more of its fair share. If he can cut this deal, nearly everybody will win — but if he can’t, no one will lose more than he will.

 

Robert J. Shapiro is chairman of the economic and security advisory firm Sonecon. He served as undersecretary for economic affairs at the U.S. Department of Commerce during the Clinton administration. In the 2016 presidential campaign, he served as an adviser to Hillary Clinton.


The views expressed by contributors are their own and are not the views of The Hill.