Watch CBSN Live

What Donald Trump's U.S. economy could look like

Latest MoneyWatch headlines
Latest MoneyWatch headlines 01:10

During Donald Trump’s whirlwind first week in office, one thing was apparent: He’s dead serious about putting his hard-line prescriptions for the U.S. into practice -- ideas that would alter the American economic landscape, for good or ill. 

The result could be a topsy-turvy country where an activist government -- the traditional hallmark of Democrats -- is trying to impose conservative goals while also forcing Republicans to swallow things like higher federal spending and budget deficits. 

In addition, it’s an America where the customary, if sometimes dysfunctional, norms no longer apply. These include free trade, corporate liberty to send jobs where the cost is lowest and a tax code laden with deductions.

Ford CEO Mark Fields on Trump 06:33

“This is a case of government on your back, micromanaging,” said economist Dennis Hoffman, a professor at Arizona State University who has voted for both Republicans and Democrats in national contests. “The government will tell you who you can hire and who you can source your products from.”

With his party holding majorities in both the Senate and the House of Representatives, Mr. Trump likely will get much of what he wants, in some form. At the congressional Republicans’ gathering in Philadelphia on Thursday, the president’s ideas met with approval and applause.

Even his call for a $1 trillion program to rebuild the nation’s infrastructure seems to be gaining traction among Republican budget hawks. This comes despite past GOP opposition to such a plan pushed by President Barack Obama -- which Republicans derided as a budget-busting boondoggle.

On trade, jobs and taxes, his first week showed Mr. Trump is keeping his word from the election campaign. While his tough prescriptions could bring better deals for U.S. consumers and taxpayers, they carry large potential downsides. 

With trade, the new president’s goal is to reverse the nation’s deficit with the rest of the globe. Now, America imports more goods and services than it exports. His method is as tough as it is straightforward: Renegotiate trade treaties and, failing that, impose high tariffs on imports. Such a confrontational course risks higher prices for U.S. consumers and a disruption of global trade that could harm the U.S. economy. 

Businesses react to Trump 03:42

By the same token, his campaign to increase American job growth could prove enormously costly in terms of the federal deficit and the national debt. 

The same trade-off exists for his plan to slash both corporate and personal tax rates: More money would be in pockets for spending, and Washington would be deeper in red ink. 

Here’s how Mr. Trump may alter the American economic status quo:

Trade. The president’s fight may be with the world, but he has targeted two key offenders to cross swords with, Mexico and China. He has the power to impose tariffs on both, although the risk is that a mutually ruinous trade war would erupt and imports would be costlier for American consumers.

In his inaugural address, he lambasted what he sees as one-sided trade that harms U.S. workers. “The wealth of our middle class has been ripped from their homes and distributed around the world,” he said. 

Last week, Mr. Trump ordered the construction of a massive wall along the U.S. Southern border border, a notion that was a staple of his campaign oratory, and his press secretary floated the idea of a 20 percent tax on imports from Mexico. The president followed that by picking a Twitter fight with Mexican President Enrique Peña Nieto that led to a cancellation of their planned meeting. 

No doubt about it: Mexico sells the U.S. more than it buys from the U.S., to the tune of $61 billion. When the two nations (along with Canada) enacted the North American Free Trade Agreement in 1993, the U.S. has a $1.7 billion surplus with its Southern neighbor. Now Mr. Trump wants to renegotiate the pact, something the Mexicans are not eager to do. 

Trump kills TPP 03:13

The president has stuck to his campaign trail pledge that he would make Mexico pay for his proposed wall, which is designed to keep its citizens from illegally entering the U.S. However, Mexican politicians and its public don’t want to spend a single peso on such a venture. So lately, Mr. Trump is saying the U.S. will pay to build it and get Mexico to pay up in other ways -- perhaps by using tariff proceeds. 

The wall won’t be cheap: up to $25 billion. The Committee for a Responsible Federal Budget estimates that amounts to $120 per U.S. household.

Meanwhile, China has long enjoyed a huge trade surplus with the U.S., which has grown from around $84 billion in 2000 to $337 billion in 2015. That’s why Mr. Trump has proposed slapping a tariff on Chinese imports of as much as 45 percent, up from the current 3 percent.   

Amid all this, the president made what appears to be a contradictory move: He withdrew the U.S. from the Trans-Pacific Partnership trade agreement. The TPP aimed to reduce trade barriers with seven nations on the other side of the Pacific: Japan, Vietnam, Malaysia, Singapore, Australia, Brunei and New Zealand. 

Absent from the pact was China, and many viewed the TPP as a means of containing Beijing’s regional regional economic influence. With the TPP all but dead, China is pursuing its own Asia-Pacific trade agreement, excluding the U.S. from the table. But Mr. Trump is convinced -- as was his Democratic opponent, Hillary Clinton -- that the TPP wouldn’t protect American jobs.

Jobs. Since overseas production often is cheaper than in the U.S., many domestic multinationals have an incentive to ship jobs elsewhere. One way Mr. Trump is attacking this situation is by proposing to impose tariffs on U.S. companies that build things in other places, then sell them in the U.S. The other way is to publicly shame employers that send jobs offshore.  

Aside from cheaper labor overseas, the motive to ship the jobs out of America is to get a lower tax bill. Washington taxes them far more -- a maximum 35 percent, although with deductions, it’s lower -- than many foreign governments do. 

Trump's executive orders 07:06

Right now, the U.S. taxes net income for American corporations, regardless of where in the world it is earned. This encourages them to shift production offshore and to keep their profits overseas. For that reason, Mr. Trump wants to lower the U.S. corporate rate.

House Republicans, however, are floating a remedy called a “border adjustment,” which is meant to boost exports and push down imports. The method sounds simple enough: Imports are taxed and exports aren’t.

But then it gets complex. Pantheon Economics’ chief economist Ian Shepherson noted that American businesspeople traveling overseas would be taxed on their expenses. At the same time, he asked, “And how would foreign tourists receive a credit for their spending in, say, U.S. restaurants?” And some import-dependent American companies, like apparel retailers, would be harmed.

As a consequence, Mr. Trump initially rejected the border-adjustment concept as “too complicated.” Then on Thursday, White House chief of staff Reince Priebus said it was part of a “buffet” of options the White House would consider. Where the president and Capitol Hill end up remains to be seen, but Mr. Trump and Republican lawmakers appear eager to do something.

Beyond that, Mr. Trump’s drive to chastise companies that push production overseas has born fruit -- in that several he has criticized have knuckled under. The question is whether one-off attacks, often launched by Mr. Trump on Twitter, will be effective in a vast $19 trillion economy, which would entail zeroing in on hundreds of corporate behemoths. 

Large enterprises, which are the ones shipping the jobs out, employ around 60 million American workers, according to the U.S. Census Bureau.  

Trump, trade & taxes 06:27

Economist Peter Morici, a University of Maryland professor, speaking on National Public Radio, cast doubt on the effectiveness of  Mr. Trump’s targeting these companies. “Let’s lean on General Motors. Let’s lean on Carrier. Let’s lean on United Technologies,” he said. “You know, all the deals in the world are not going to give you the kind of turnaround and jobs growth that he needs. For example, 100,000 more jobs a month would mean a hundred deals a month.”  

Indeed, the math is daunting. Take Mr. Trump’s announcement Wednesday that Sprint (S) would be bringing 5,000 jobs back to the U.S. over the next 15 months. The U.S. economy in 2016, though, created 6,000 jobs per day. 

Taxes. For personal income taxes, Mr. Trump and House Speaker Paul Ryan, R-Wisconsin, both want to lower tax rates and the number of tax brackets, although they differ on some details. The president would cap deductions at $200,000 for a couple. Ryan would end itemized deductions except for charity and mortgage interest.

To be sure, Mr. Trump’s plan, as unveiled during the campaign, would put more money in everyone’s pocket, with wealthier taxpayers benefiting the most. An analysis by the Tax Foundation think tank found that those in the top 1 percent of income would gain as much as 16 percent, and those in the 40 percent-60 percent segment would get only 1.3 percent more. Mr. Trump has disputed that analysis.

In terms of corporate taxes, the president wants to lower the top rate to 15 percent from the current 35 percent, and Speaker Ryan opts for 20 percent, which he believes would be more fiscally prudent. They also both want to engineer a repatriation of some $2 trillion in U.S multinationals’ profits now stashed oversees, free of the IRS. 

Trump's Twitter effect 05:45

Their hope is that the money would flow to building new plants and equipment and to hiring more Americans. The trap here is that the funds might instead end up going to stockholders in the form of higher dividends and share buybacks. That would be an economic stimulus, certainly, yet wouldn’t juice businesses and jobs directly. 

The last time a repatriation happened, in 2004, the government charged a special low tax rate of 5.25 percent and, sure enough, the money corporations brought home went mainly to investors. 

The one thing that a lower corporate rate would accomplish, said John Maloney, chairman of New York-based M&R Capital Management, is to boost smaller businesses -- which usually aren’t public companies with shareholders and have no overseas operations.

“Small companies are the ones that create most of the jobs,” Maloney said. And they tend to pay higher rates than large corporations, who, thanks to clever uses of deductions and the like, may pay an effective federal tax rate as low as 10 percent. “The small and midsize businesses don’t have the accounting firepower” from expensive law and accounting firms that the big corporations do, he said.

None of this comes cheap. The Committee for a Responsible Federal Budget estimates that enactment of Mr. Trump’s plans would add $5.3 trillion to the national debt, pushing it to 105 percent of GDP from 77 percent now. The president’s team has disagreed with that conclusion, saying the economic bonanza from the president’s program would lead to a torrent of new tax revenue.

Whichever is right, the momentum for now seems to be with the Oval Office’s new occupant. And America’s reality may reflect his economic vision, sooner or later.

View CBS News In
CBS News App Open
Chrome Safari Continue