President-elect Donald Trump proposed an economy that demonstrated his rather skimpish knowledge of economics. Despite being perceived as a financial wizard and gritty negotiator from his time on “The Apprentice,” Trump has famously filed for business bankruptcy at least four times, even managing to bankrupt his own casino.
Trump’s net worth is estimated to hover around $8 billion, and he has undoubtedly created an empire over the last 50 years. Yet, entrepreneurial success does not always translate to an understanding of economics, especially when that ‘success’ is underscored by controversy and questionable beginnings. Unlike a personal business, the economy affects the entire country. The risks that Trump and like-minded entrepreneurs get away with in the world of business will have real consequences for the American people.
Trump has proposed high tariffs, which are taxes on imported goods. He has also proposed to eliminate the federal income tax in order to negate inflation; the loss of tax revenue would be replaced by revenue from tariffs. However, economists from the Peterson Institute found that these proposals “would cost jobs, ignite inflation” and “shift the tax burden away from the well off, substantially increasing the tax burden on the poor and middle class.” The institute also noted that tariff rates would have to be “implausibly high” to replace the income tax. Calculations predict that even with a 60% tariff on Chinese imports, the U.S. would see about $225 billion per year, whereas income taxes would generate nearly $2 trillion. Trump’s plan will — by the most basic principles of economics — create inflation, provide less-than-expected benefits to U.S. producers and place the tax burden on the lower and middle classes.
1. America should not be treated like a business.
Just because China imposed tariffs on us doesn’t mean we should do the same to them. Trump is primarily seeking to punish China, but America cannot afford to risk economic security for payback. From a basic economic standpoint, a tariff causes the price of goods to increase. When imported goods enter the country, producers pay the tax and raise their prices to account for this loss. China does not pay this tax, but Trump’s argument is that it will discourage trade and decrease their revenue. However, we rely on foreign goods because they are cheaper. When protectionist policies are implemented, U.S. producers will inevitably raise their prices and contribute to inflation.
2. Labor and resources are not always transferable.
While the general argument in favor of tariffs is that they reinforce domestic production, issues arise in the U.S. when you account for the highly specialized and modern nature of its industries. America produces machinery, chemicals and food. China produces textiles, metals and various electronics. The means of production — types of workers, inputs, etc. — are not easily transferable across these products, so when domestic production is reoriented towards producing goods like T-shirts, the U.S. has to divert resources away from their specializations. In economic terms, this specialization is called a comparative advantage. While this may help the economy in the short run, in the long run, when America is not producing with a comparative advantage, we will see declines in productivity. Additionally, obtaining more domestic resources provides another reason for higher prices, as producers will charge more for their efforts.
3. Lastly, the importance of taxes.
While cutting income taxes would give consumers more to spend on higher-priced goods, you can’t just eliminate these taxes as they are crucial to supporting the high levels of education, healthcare and defense that the U.S. knows today. Trump’s Department of Government Efficiency would supposedly make the U.S. spend less, meaning tariff revenue would be enough to fill in this gap. However, Elon Musk and Vivek Ramaswamy, the incoming leaders of the department, have made it clear that it would be more like slash-and-burn “government downsizing” than government efficiency. When producers are taxed, they shift the burden to consumers by charging higher prices. While decreased taxes may allow consumers to spend more in the short run, the tariffs will never match the income tax revenue that has driven America’s progression for decades.
Only time will reveal the true outcomes of Trump’s proposed economic policies. However, most economists, historians and anyone who took a high-school economics class would likely agree that his plans will hurt the American people.
