Trump's economic report misses mark on key issue: wage growth

Trump's economic report misses mark on key issue: wage growth
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It’s February of 2018 and the U.S. economy is fairly healthy. GDP growth for the past few years has kept apace, if not exceeded, GDP growth in other developed countries. The unemployment rate is at 4.1 percent. Stock markets and corporate profits have been soaring, and a hiccup in the first week of February hasn’t set us off course. 

There’s one thing that complicates the issue: Wage growth for the average worker has been sluggish for the past couple decades. Which means that, despite recent gains, many Americans are feeling worse-off. This trend has left economists scrambling for explanations. 

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The Trump administration's first economic report to Congress ignores the nuances of the current economic condition and offers a bold but distracting thesis: Don’t settle for the type of growth we’ve had recently. Let’s go back to pre-financial crisis growth. The potential is there, we just need to unlock it by cutting taxes, removing regulations and fixing infrastructure.

 

Trump’s major proposals seem to make sense. But if he ends up being wrong, his policies will come at a large cost. 

Chapter 1, taxes and growth: C-

The tax plan passed in December cuts taxes for most individuals, but only for a few years. There are a series of seemingly innocuous changes that will gradually push most middle-class taxpayers into higher tax brackets.

Corporations, on the other hand, will experience a permanent reduction in their tax rates from 35 percent to 21 percent. There are two reasons a reduction may have been warranted: High marginal rates encourage leverage, and tax havens abroad have been spawning all sorts of profit-shifting schemes.

While it is true that the corporate tax cut will generate some new investments, credit markets have been favorable to businesses in the past few years and costs of capital are already at extreme lows. If Trump’s investment prophecy falls short of its mark, the net result will be a cash transfer directly into the pockets of those who own corporations, financed by a big hit to the deficit. 

Chapter 2, deregulation that frees the economy: F

This chapter stung because I had high hopes. I support the idea that excessive regulations can act as barriers to entry that restrict labor mobility and allow existing business owners to profit at the expense of consumers. However, these are largely state and local problems, and they call for a coordinated effort to evaluate and harmonize licensing standards.

Trump’s proposed solution is a full bait-and-switch. His efforts are aimed at reducing restrictions in the energy and financial services sectors. If anything, those are the two industries in which existing regulation is crucial. 

It’s important that we keep in place environmental protections, particularly in light of Trump’s wavering stance on the Paris climate agreement. As for deregulating the financial services industry? Let’s ask the American people what they think.

Chapter 3, labor market policies to sustain the middle class: B-

Most of the policy recommendations in this chapter have little bite. They are a series of suggested nudges aimed at labor-force participation for young and old people. When it comes to real solutions, though, the report makes vague claims such as “encouraging internal migration is one possible tactic; but there has been little research on how the Federal government might do so.”

Chapter 4, infrastructure investment to boost productivity: B+

Trump’s report rightly points out that many key links in the nation’s infrastructure are beyond capacity. The perennial issue is in how to afford such spending, however. The report suggests new financing solutions that involve state and federal collaboration, but it’s unlikely that many states will be able to generate the funds needed to meet Trump’s $1.5-trillion initiative.

Chapter 5, enhancing U.S. trade in a global economy: B-

Anger toward China pervades a section that otherwise takes a careful approach to the topic of international trade. To be fair, globalization has probably played a significant role in wage stagnation. Unfortunately, it’s impossible for economists to determine precisely how much.

Trump’s report delves into areas in which the U.S. is being treated unfairly, discusses displaced workers and emphasizes U.S. energy dominance. It falls short in action, however. While the report may call for tougher trade deals, all practical signs point to a balance of bargaining power that is shifting away from the U.S., not toward it.

Chapter 6, innovative policies to improve all Americans’ health: C-

Trump’s team takes aim directly at the Affordable Care Act, extensively describing its shortcomings. In any case, the individual mandate has already been repealed as part of the recent tax plan. The report also focuses on introducing more competition to the pricing of drugs.

It largely ascribes the problem of high prices to Medicare, Medicaid and unfair international practices. Up until this point, I’m unsold. The report goes on to mention proposals to expedite generic drug approvals and reduce the market power of pharmacy benefit managers, though, which are steps in the right direction.

Chapter 7: fighting cybersecurity threats to the growing economy: A-

This section is largely a summary of recent private-sector cybersecurity attacks. Aside from the notion that cybersecurity systems are public goods, there’s not much economics here. Trump is leaving private-sector risks largely up to the private sector, which is probably well-advised.

Meanwhile, the government will continue to invest in research, facilitate international cooperation and promote training in computer science. While I appreciate the nod to diversity in STEM, reforms to education seem once again vague.

Overall, Trump’s economic report focuses mainly on the tax plan, the energy sector and the role of state and federal collaboration in infrastructure spending. The tax plan alone is enough to entirely contradict what should be the current objective of bringing down the deficit.

While the report touches on some of the issues that relate to wage stagnation, it offers little by way of tangible policies that will make workers better off. 

Katherine Waldock is an assistant professor of finance at Georgetown’s McDonough School of Business and co-host of the podcast, "Capitalisn’t."