Government and Institutions

Donald Trump’s fairy tale economics would be terrible for America

The Republican Party must be tearing its hair out. For years, visitors from the US have extolled the strength of the party’s potential Presidential candidates for 2016. The pack is certainly more impressive than in 2012 and, with the exception of one or two candidates, they are ostensibly advocates of relatively free market policies. In a campaign against an unlikeable Hillary Clinton, many conservatives were quietly confident of victory in 2016.

But all these voices are being drowned out by the brash businessman and property magnate Donald Trump. The most worrying aspect of Trump’s candidacy is his contribution to the economic debate. Trump is a nativist and a protectionist. He laments that America imports cars and exports corn – taking the mercantilist position that imports are bad and exports good, alongside a Ross Perot-like fetish for manufactured “stuff”. This shows complete ignorance of comparative advantage – and trade being about the exchange of things people want and need.

Trump therefore promises “fair” tariffs on imported goods, and a crackdown on China’s currency manipulation through taxes which reflect currency “undervaluation”. This would likely start a trade war at a time when a growing Chinese middle class offers untold opportunities for rich Western countries to export services. But Trump doesn’t stop there. He also wants to tax firms that “export jobs” and factories overseas. In particular, he laments the fact that many call centres are based in India.

This shows a remarkable misunderstanding of the way the world works. Call centres are based elsewhere because, at the moment, it is cost-effective to do so. But these specific jobs being overseas need not lower US output or welfare. In fact, it helps lower prices for US consumers, and workers are freed up to work in higher-value occupations.

Even on fiscal issues, Trump has bizarre views. He’s promised the seemingly inconceivable agenda of hugely lower tax revenues and reduced spending, but balancing the books while leaving the big entitlement programmes – which are the real, long-term drivers of US debt – largely untouched. In the past, he’s advocated a potentially catastrophic one-time high wealth tax to “pay off the national debt” – a $5.7 trillion liquidation of assets that would have seen substantial capital flight and severely affected the US economy. While he’s not advocating a repeat today, he still promises populist “no pain” solutions to America’s long-term fiscal challenges that seemingly ignore reality.

Quite simply, Trump’s nativist economics agenda and fiscal fairy tales are not what the Republicans or the US need. They’d better hope he fades sooner rather than later.

Ryan Bourne is the IEA’s Head of Public Policy. This is an abbreviated version of an article which appeared in City AM.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

2 thoughts on “Donald Trump’s fairy tale economics would be terrible for America”

  1. Posted 29/07/2015 at 14:47 | Permalink

    “Workers are freed up to work in higher-value occupations”. Thats a good one – in a world in which it is now being recognised that the middle classes are increasingly seeing their jobs being wiped out and finding themselves forced into lower-skill, lower-paying work.

    Perhaps you could provide actual data of what these other, “higher-value” jobs are?

    On outsourcing, you ignore the disaster of such experiments in the US as outsourcing medical secretaries’ work from Chicago, with medical issues that followed, causing human suffering and death, and some whopping big lawsuits.

    And that’s without mentioning that many people detest outsourced call centres because it can complicate whatever business you’re trying to do when you make a call; because it’s damned annoying being treated as an idiot by someone who is clearly on/from the Indian sub-continent introducing themselves as ‘Trevor, or the implications of high-paying (relatively) call centre jobs drawing qualified people away from other, much more highly-skilled and socially useful work in those countries (eg medicine, engineering etc).

    As the experience of Wal-Mart shows (see Charles Fishman’s book on this) the drive to lower prices to the customer reduces quality and sees jobs lost. In areas where Wal-Mart launches a new store, poverty will be increased within five years.

    Trump is an idiot, but this is naive at the very best.

  2. Posted 09/08/2015 at 21:17 | Permalink

    Nice article! This is a great discussion on one of the most fundamental economic concepts: comparative and absolute advantage. We live in a country where the economy is extremely competitive, as people are constantly scrambling on ways to maximize margins on their profits, either by investing heavily on R&D, or by cutting costs by offshoring some activities (moving call centers, manufacturing, production, and handling to the rest of the world). The harsh reality is that as the U.S. progresses, the population in general is becoming much more adept at their job, and value themselves much higher than those who work in the rest of the world (take our minimum wage for example, where people are given as high as $12/hr minimum wage in some states, where in some places in India, people are paid as little as $0.03/hr). The general population is much more educated because of increased competition (attending college is a minimum now, and the internet makes it very easy for anyone to learn), and therefore, are capable of doing much more knowledge intensive work (architects, doctors, engineers, and even skilled laborers). As such, foreign countries have a clear comparative advantage over the united states in simpler laborers. While the U.S. has an absolute advantage arguably in almost all sectors in terms of quality, the time U.S. workers invest can be better spent in innovative fields where anyone with an education can potentially make an impact in. There is no need to bring the call center or manufacturing jobs back to the United States, as businesses are able to reduce costs by offshoring these aspects of their company, and are using the extra margins to either reinvest into the American economy, either by further research or by hiring extra workers to make their efforts more efficient.

    This is a very basic economic concept that Trump doesn’t seem to understand, and may cripple the growth of the American economy, which is arguably the home to some of the move innovative movements, especially in technology (development of clean energy, machine learning, software innovations, and the like), that command trillions of dollars in the U.S. economy. While Trump’s ideas may seem appealing to the general public (who simply want more job opportunities), there are many economic drawbacks to bringing back jobs that other countries have a comparative advantage in.

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