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Trumponomics Gets Scarier When You Actually Study It

Paula Dwyer writes editorials on economics, finance and politics for Bloomberg View. She was London bureau chief for Businessweek and Washington economics editor for the New York Times, and is a co-author of “Take on the Street: How to Fight for Your Financial Future.”
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Hillary Clinton is trying to scare the heck out of voters who think Donald Trump's business record qualifies him to be president. He has no real economic strategy beyond over-the-top promises, she said on Tuesday, and the few ideas he offers would cause millions of Americans to lose their jobs. "Just like he shouldn't have his finger on the button, he shouldn't have his hands on our economy," Clinton said.

Well, OK, what did you expect her to say? There's a campaign going on! What happens when you ask some politically neutral economists to look at the U.S. economy under a President Trump? You get something titled "Macroeconomic Consequences of Mr. Trump's Economic Policies." Laid side-by-side with Clinton's partisan assessment, it's even scarier.

The appraisal, from Moody's Analytics, is neither a liberal nor a conservative take, but a straightforward look at what might happen if Trump's tax-cut, immigration and trade policies became law. Using economic models similar to those the Federal Reserve and the Congressional Budget Office use, the analysis estimates how Trump's proposals would affect interest rates, jobs, the budget deficit, markets and growth.

Trump's proposals would probably give the economy a short-term boost before wrecking it soon afterward, said Mark Zandi, a co-author who advised Republican nominee John McCain's campaign in 2008 and has contributed to Clinton's this year.

In year one of a Trump presidency, for example, the study predicts that gross domestic product would rise by 3.7 percent and employers would add 4 million jobs to bring the unemployment rate down to 3.5 percent. But like a sugar high, the initial boom would swing quickly to bust, and a long, deep recession would hit.

It all begins with Trump's tax cuts, which are so massive they would result in $9.5 trillion in revenue losses over a decade. Because Trump wants to spend more on the military and for veterans' health care, plus protect Medicare and Social Security from cuts as well, the federal deficit would jump -- and require substantial borrowing to finance. For a year, the government spending combined with the tax cuts would act like a huge stimulus.

It would wear off quickly. By year two, Trump's immigration and trade policies would start to kick in. He wants to send some 11 million undocumented immigrants back home, impose 45 percent tariffs on imports from China and 35 percent tariffs on the goods of any U.S. company that moved jobs offshore.

With the job market already near full employment, labor shortages would result once undocumented workers who make up 5 percent of the labor force begin leaving the country. (The study assumes most would self-deport and that workplace raids would be minimal). Employers would have no choice but to raise wages to attract and keep workers.

Next, the borrowing needed to finance the deficit -- by the end of 2020 the shortfall would be about $1 trillion higher than under current law -- would drive up interest rates. Consumer prices would also rise once higher tariffs took effect and the Chinese retaliated with levies of their own. China and Mexico account for 35 percent of non-oil imports. Higher tariffs, the analysis says, would raise U.S. consumer prices by almost 3 percent.

The combination of higher wages, consumer prices and interest rates would send inflation soaring. The consumer price index, which was at 1 percent in May, would rise to 4.2 percent by the end of 2019, the analysis says. The Fed would move quickly to tamp down inflation expectations by raising interest rates. The result would be a recession in Trump's second and third years in office.

By the end of four years, unemployment would hit 7 percent, more than two points higher than it was in May. If President Barack Obama's policies continued, the Moody's economists say, employment would rise by 6 million, versus a 3.4 million decline under four years of Trump.

President Trump would send the nation's total debt ballooning -- from 75 percent of GDP at the end of 2016 to more than 130 percent a decade later. Over the same period, 10-year Treasury yields would jump to 6.7 percent from about 2.4 percent. The S&P 500 would plummet and not recover its 2016 level until 2021.

Lower- and middle-income households would bear most of the recessionary burden, the authors claim. Inequality would worsen because Trump's tax cuts would mostly help the wealthy. "It would be a difficult four years for the typical American family," the analysis says.

Trump's camp complains that the Moody's analysis doesn't credit him enough for the stimulative effect of tax cuts and deregulation. To that, Zandi says, "But I do." He even gives Trump the benefit of the doubt in many cases. The analysis, for example, assumes domestic spending would be cut by $2 trillion over 10 years, even though cuts of that magnitude would be politically difficult to make. It doesn't take into account some of Trump's more preposterous ideas, such as negotiating repayments with investors in Treasury securities and bringing back the gold standard.         

The analysis also assumes the shrunken labor force from his immigration plan would take eight years to complete, rather than the two years Trump claims. And it assumes that China and Mexico would retaliate with higher tariffs of their own but that a broader trade war wouldn't erupt. That's pretty optimistic.

The Moody's team considers other scenarios, including one in which Congress greatly waters down Trump's proposals. Even then, the economy would be smaller, the U.S. would be isolated from global trade and its attractiveness to immigrants and foreign investors would be diminished. Perhaps that's the way Trump likes it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Paula Dwyer at pdwyer11@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net