The Bureau of Labor Statistics reports the U.S. economy has added nearly 2.2 million jobs in the last 12 months.

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The Economy And Trump: Gestures Versus Policy

January 20, 2017

One of the arguments that President Donald Trump made during his presidential campaign was that he could restore the economy and bring jobs back to America. Trump has called for trade agreements to be more beneficial for the U.S., dramatically lowering the corporate tax rate and repealing and replacing Obamacare.

Mihir Desai, a professor of finance from Harvard University, joined WGBH’s Morning Edition host Bob Seay to discuss President Trump's economic policy changes. 

Bob Seay: One of the things that Donald Trump kept saying during his campaign was that we have lousy deal makers here in the American government and we've made bad trade deals that have hurt our economy. Do you agree?

Professor Mihir Desai: Well, it's certainly the case that the population seems particularly upset with globalization. The question is whether they really understand what the alternative is—which is a set of bilateral agreements that could take years or decades to put together. So, the way we're currently structuring global trade is through arrangements with the World Trade Organization as well as some regional agreements. Once you start to append those, you end up in a world where you are negotiating bilaterally with countries—country on country. And that is where the world used to work 50, 100 years ago, but it's actually quite cumbersome and can lead to a great deal of retaliation. That retaliation is ultimately going to hurt American consumers and, in particular, the lower to middle classes who consume a lot of those goods. So, the perversity of all this is he's selling something to the population which is probably contrary to their interests.

 Seay: What about his proposal to lower the corporate tax rate?

Professor Desai: Well, I think of all his proposals, that's the one with, actually, the most merit. And the reason for that is the corporate tax, broadly speaking, is broken. And I think both sides of the aisle recognize that today. And I think he's proposing two things that might help. One is a pretty dramatic reduction in the rate because our rate is very high, which gives companies incentives to ship profits and, potentially, investments overseas. And then, secondly, he's changing the worldwide system. We tax citizens on their worldwide income. And he's talking about changing it so that we only tax people on their income inside the United States. Both of that would help investment. And, frankly, if you really want median wages to rise, the best thing to do for that is to generate more investment in the United States. And I think the corporate tax, of all the things he's talking about, is the best recipe for that.

Seay: When he talks about bringing jobs back to America, haven't we gone past a certain industrial stage in our economic development and hasn’t automation had an effect on this? Is it really possible to do what he says he wants to do?

Professor Desai: Well, I think you're exactly right. I mean, all the evidence suggests that the vast amount of the jobs that have been lost are due to automation as opposed to globalization. You know, we may be actually seeing the beginning of a set of kind of populist measures that are really gestures as opposed to substantive policy making. And the question is whether he has the temperament or the patience for deep policy change as opposed to one-off kind of jawboning activities which seem bigger than they really are.

Seay: One of the things that he's constantly talking about is repealing and replacing Obamacare. What would be the economic effect of that?

Professor Desai: Well, here we're really into terra incognita. I mean, we have no idea what he really means and what the effects are going to be. So, we could see anything from, actually, preservation of the ACA but relabeled in some way or, alternatively, we could see a real repeal of it, which would be a switch to things like tax credits to buying health insurance. So, we really need to converge on a solution that's much more sustainable than what we have. I think, unfortunately, we have no idea what that means right now because the nature of the rhetoric has been so ambiguous.

Seay: Now, a lot of Massachusetts politicians have been very critical of Donald Trump. In fact, our own governor who's a Republican said he didn't vote for him. Do you think there could be any kind of economic backlash as a result of that?

Professor Desai: Well again, we are in a strange place today so that I guess is possible… I doubt it because my sense of most of these things, at least so far, has been that he and the administration is interested in gestures more than they're interested in real actions. So, I think what we're going to see is more of that. The only way that could potentially happen, politically, is if he stays in power a great deal of time, becomes quite popular and then he can maybe exact retribution.

Seay: Well I know Donald Trump has railed against high prices of aircraft, defense expenditures and pharmaceuticals as well—two very important industries for those of us here in Massachusetts.

Professor Desai: Let's take those two separately, right. So on defense, I think, again, there's been this jawboning or claims that he's actually negotiated prices downwards. I don't think that's a real long-standing effect. I think if anything, the first order effect for defense is probably positive in the sense of just perhaps larger military spending. So I would be less concerned in that sector. I think the pharma sector it's more questionable because that is a populist talking point –high prices of drugs and it has wide resonance. Now how that takes place and how that gets lobbied through is going to be something that we'll see in the next six months. And frankly, the stock market has already priced that—which is, some of those companies have really been hit because of all this talk. So I think of any sector, it's actually the pricing on some of those drugs which is most likely to get affected. Having said that, that's been talked about for the last 10 or 15 years and lobbying has resisted it and we've managed not to have that, at least, so far. 

To listen to the entire interview between WGBH's Morning Edition host Bob Seay and Professor Mihir Desai, click the audio link above. 


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