Economic Plans of Trump, Sanders, and Clinton Are Fantasies
Donald Trump, Hillary Clinton, and Bernie Sanders: A rogues gallery of economic ignorance
Image Credits: Top Left to Right: Wikimedia Commons/Michael Vadon, Wikimedia Commons/Voice of America Bottom: Wikimedia Commons/Gage Skidmore
Nobody exhibits the economic ignorance of many of our major political figures better than our Dear Leader, President Barack Obama. Reuben Brenner on the Asian Times website quoted Obama from a speech he gave in Buenos Aires recently that there is “no difference between capitalism and communism, choose whatever works”. Brenner also kindly provided a video link to Obama’s speech so we can see the quote does not have some hidden meaning provided by context. If you listen to his speech, Obama says the younger generation should not worry about any differences between socialism and capitalism, but should be practical and accept any scheme that “works”. The problem with the President’s prescription is that socialism has never worked, and there are excellent reasons for believing it never will work! Some additional reasons for believing the non-functionality of socialism can be found in the posts Central Planning for Chaotic Social Systems, How to Solve Problems in Chaotic Social Systems, Meanings of the Word Socialism, Economic System States, Feedback Loops, and Adam Smith’s Invisible Hand, and Chaotic Economies and Adam Smith’s Invisible Hand.
However, we only have to endure Obama’s economic ignorance for about another nine months. Where we should really be focussing our attention is on the economic beliefs and plans of the presidential candidates who propose to replace him. In this essay I will examine the economic plans of the front runners in each party: Donald Trump, Bernie Sanders, and Hillary Clinton. I include Bernie Sanders since it seems quite likely Hillary Clinton will be indicted for felonies in handling highly classified information sometime during May. If that happens the Democratic Party would be crazy selecting her as its presidential nominee.
Donald Trump’s Economic Plan
Trump might be a good businessman, but his ignorance of things economic is palpable. Begin with his major idea for creating new jobs, which is to bring them back from where they were off-shored overseas, particularly from China and Mexico. This proposal shows gross ignorance about Ricardo’s law of comparative advantage. If two sides of an international trade both find the trade profitable, it is because:
- The producing and selling country can usually produce the product cheaper than the buying country and can always sell it to the foreign buyer for more than they can in their domestic market, and
- The buying country can obtain the product cheaper from the foreign seller than it could by producing the product itself.
Now let us suppose Trump pulls the wool over voters’ eyes and persuades them to elect him. If Trump then does something like impose import tariffs to force American companies to find domestic sources for the imports, he will also create increased costs for the American companies. The whole point of importing the goods was the companies could then obtain the goods cheaper than if they obtained them domestically. The increased costs by producing them in the U.S. would then be passed on to the customers. Since the good’s price is increased, the law of supply and demand would then dictate consumers would buy less of it. The consumers would be less satisfied and the companies selling the good would have a smaller profit. Some American workers might be hired to produce more of the good, but with overall costs to the American economy having gone up, even more workers would lose their jobs elsewhere.
If the United States had a free-market economy (from which, alas, it is increasingly diverging), U.S. companies that saved capital by out-sourcing the production could use that saved capital to produce a more profitable product. Getting more profit, it would hire more workers to produce even more until the market for the more profitable product saturated according to the law of marginal utility. In an economy made richer by international trade and in which capital could be quickly shifted to more profitable uses, job losses due to the out-sourcing would be more than compensated by new jobs elsewhere. Unfortunately, the hostile business environment erected by governments at all levels impedes the flow of saved capital to new uses. For evidence of this hostile economic environment, see the posts Economic Effects of the Dodd-Frank Act, Economic Damage Created by the Fed; Economic Effects of Current Tax Policy; The Burden of Government Regulations; The Debilitating Effects of Obamacare; The EPA, CO2, Mercury Emissions, and “Green” Energy; and Big Corporations Abandoning the U.S. at an Increasing Rate. Trump and others who complain about off-shoring of jobs would do far better to complain about this hostile, growth-impeding environment. Becoming protectionist the way Trump advocates would only impoverish us all further.
Then, there is what the combined effect of Trump’s positions on entitlements, the national debt, and taxes would be. He has pledged to leave entitlements essentially unchanged. Yet at the same time he says the national debt must be cut back and taxes reduced. When about two-thirds of all federal spending is on entitlement spending (Social Security, Medicare, and Medicaid), neither Trump nor anyone else can balance the budget by cutting the remaining one-third without crippling national defense, air-traffic safety, operations of the federal courts, and a thousand and one other very, very necessary federal functions. Do not get me wrong. I do recognize there is a great deal of wasteful federal discretionary spending that could be cut with no harm to the nation. The problem, however, is the non-discretionary spending of entitlements is so completely dominant, and it is also rising very, very fast. The Heritage Foundation projects entitlement spending at 34% of GDP by 2035. Long before then it will have gobbled up the entire federal budget. That is, it will have devoured the entire budget if the increasing interest on the national debt has not demolished the budget first.
All of this is true assuming no tax cuts are introduced. This situation becomes much worse if we have to borrow a lot more to sustain the spending because we have cut taxes significantly. As The Rahn curve, Hauser’s Law, the Laffer Curve and Flat Taxes teaches us, we have to cut both federal expenditures and federal taxes simultaneously to increase both the GDP growth rate and federal revenues at the same time. Both those actions are necessary to release assets to the wealth generating parts of the economy: the corporations. But to satisfy the expenditure cutting part of the requirement, we must look to the entitlements for most of the cut-backs. The rest of the federal budget is simply not large enough. To follow Trump’s plan would result in the financial suicide of the country.
Bernie Sanders’ Economic Plan
If Donald Trump is crazy, Bernie Sanders is way off in la-la land! Like Donald Trump, Sanders is a protectionist. As the Daily Beast post in the last link observes,
Both Donald Trump and Bernie Sanders have seized on trade as a convenient scapegoat for the nation’s economic woes. There’s deep irony here. The popular frustrations on which they feed stem mainly from the productivity and wage slump America has experienced since 2000. Yet their proposed fix—shredding international treaties and walling off the U.S. economy—is a textbook formula for economic stagnation.
Everything I wrote concerning Trump’s protectionist position can be repeated verbatim for Bernie Sanders, so I will not elaborate further.
However, Trump at least showed some awareness the federal deficit spending needed to be stopped. Sanders, being the democratic socialist that he is, seems to want to nationalize not just health care, but a large fraction of the GDP as well. Among his proposals for additional federal government spending are the following.
- Government providing free college tuition for any student at state colleges and universities. (I guess if you go to a private university, you are out of luck.)
- Government entitlement for medical and family leave from work.
- Rather than cutting any entitlements to avoid federal government financial suicide, Sanders would increase spending for an expansion of entitlements for the retired and the disabled.
- A European-style government single-payer national health insurance.
- Major new infrastructure programs.
- Universal childcare and pre-school programs.
To finance all this Sanders would introduce massive increases in taxes, directed mostly at high income households, The Tax Policy Center of the Urban Institute & Brookings Institution estimates Sanders’ tax proposals would raise $15.3 trillion over a decade, or about $1.53 trillion per year. At the current GDP of $18.2 trillion, that is an increase of taxes that is about 8.4% of GDP! In fact spending by a President Sanders would be between 30 and 35% of GDP, while the federal spending since the times of Lyndon Baines Johnson has averaged close to 20% of GDP. In my post Distribution and Use of Wealth in U.S. Capitalism, I argued that any increase in taxes on the wealthiest would result in a similar reduction in the country’s total investments. If taxes on high income households are increased by 10% to 15% of GDP, the total investments would be reduced by similar amounts. Would total investments still be enough to meet needed replacement investments? If not, our country’s economy would enter a death spiral of insufficient replacements causing productive capacity to decay. Does Sanders realize this? Somehow I doubt it.
Hillary Clinton’s Economic Plan
Since I have already written about Hillary Clinton’s plans in the post Hillary Clinton’s Proposed Destruction of the Economy, Clinton is the easiest of the three front-runner candidates to cover. Like Sanders, who has steadily been driving Clinton toward the Left, Clinton is in favor of massive tax increases. Initially, she adopted fairly standard Democratic positions: raising a national minimum wage to $15 per hour, cutting middle class and small business taxes, increasing taxes on the wealthy, more spending on infrastructure, new child care benefits, subsidies for college tuitions, laws to aid unions to expand, and increasing punitive damages on both corporations and their CEOs for infractions of the Dodd-Frank Act. Additionally, she would “encourage” long-term economic growth by increasing corporate short-term capital gains taxes. Leave it to a Democrat to encourage long-term investments by increasing short-term taxes and the complexity of the tax structure!
The fast-evolving problem of large corporations fleeing the United States through “corporate inversions”, allowing U.S. multinational corporations to escape the punitive U.S. tax regime, has motivated Clinton to suggest a punitive way to halt the outflow. The basic problem is the non-competitive corporate taxes levied by the U.S. federal government, as described in Economic Effects of Current Tax Policy. The non-competitive nature of U.S. corporate taxes is due to more than their high level, but to the world-wide tax approach of the United States as well. This means that profits earned by a U.S. multinational overseas are taxed first in the country in which the profit was earned, and a second time by the U.S. if the profit is repatriated to the United States. Almost every other country in the world taxes their multinationals according to a territorial approach; that is, their multinationals have their profits taxed only in the country in which the profit was earned. This places U.S. multinationals at a disadvantage with companies from almost all other countries.
How would we expect Democrats to react to U.S. companies leaving the United States and relocating themselves as foreign companies? Why, by denouncing them as traitors of course; and then by seeking to create some rule or law that would severely penalize such companies. They would never think of changing from a world-wide to a territorial tax approach, nor to reduce U.S. corporate taxes so that U.S. companies could become internationally competitive again! Instead, Clinton would introduce rules that would complicate any such flight, and if all else failed she would impose an exit tax. However, none of her suggestions does anything to solve the root problems motivating corporations to flee. The federal corporate tax rate of 35% is still the highest in the world, other than for Chad and the United Arab Emirates. The Wall Street Journal points out this tax burden increases to 40% on average if you include state taxes. As the WSJ states, “But high rates create a vicious policy cycle, because governments that try to sustain their high rates in the teeth of global competition inevitably end up spending resources adding regulation after regulation in an effort to close off the exits.” One can observe this principle in action with Mrs. Clinton’s proposals.
Imposing stultifying tax increases on companies is the wrong way to go if you desire a healthy, growing economy. As we saw with the Rahn curve in The Rahn curve, Hauser’s Law, the Laffer Curve and Flat Taxes, if we want to increase economic growth rates, we have no choice but to decrease federal taxes.
How could we have possibly ended up with three presidential front-runners who are such economic ignoramuses!
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