President Donald J. Trump delivering his inaugural address, January 20, 2017
Screenshot of ABC News broadcast

Uncompromising. That was the major tone of Donald Trump’s inaugural address on the west side of the Capitol building yesterday. Rather than being a partisan speech giving a list of what he would try to accomplish, it was a scathing indictment of the establishments of both political parties. In the words of the inestimable Peggy Noonan in the Wall Street Journal,

He presented himself not as a Republican or a conservative but as a populist independent. The essential message: Remember those things I said in the campaign? I meant them. I meant it all.

A Battle Challenge to Both Republicans  and Democrats

Very early in his address, Trump laid down the marker for where he stood when he declared,

But we are transferring power from Washington DC, and giving it back to you, the People. For too long, a small group in our nation’s capital has reaped the rewards of government while the people have borne the cost. Washington flourished—but the people did not share in its wealth. Politicians prospered—but the jobs left, and the factories closed. The establishment protected itself but not the citizens of our country. Their victories have not been your victories. Their triumphs have not been your triumphs, and while they celebrated in our nation’s capitol, there was little to celebrate for struggling families all across our land.

If Bernie Sanders had been nominated by the Democrats and been elected, he could have used these exact same words, with one exception. Sanders would not have said —at least not in good conscience — that he would be transferring power from the federal government back to the people. Of course, had Sanders been elected, his program for action would have been far to the Left of Donald Trump, and he would have grabbed even more power for the government.

Uneasy Republican congressional leaders must be asking themselves just how much Trump will seek progressive aims. How much will Republican leaders be able to cooperate with Trump, and how much will they have to fight him? Trump must already know he can not hope for much cooperation from the Democrats, who to a large extent have rejected Trump’s legitimacy as president. At least 67 Democratic House of Representatives members refused to attend the inauguration to express how illegitimate they considered Trump’s election. If Trump also engages in combat with his own party, how much can he hope to get anything done?

Given the divisions in our country over war with the jihadis, one important statement indicated how intensely he would fight islamic radicals.

We  will reinforce old alliances and form new ones, and unite the civilized world against radical islamic terrorism, which we will eradicate completely from the face of the Earth.

One extremely heartening point Trump made toward the end of his speech was the following:

At the bedrock of our politics will be a total allegiance to the United States of America, and through our loyalty to our country we will rediscover our loyalty to each other. When you open your heart to patriotism, there is no room for prejudice. … It’s time to remember that old wisdom our soldiers will never forget: That whether we are black or brown or white, we all bleed the same red blood of patriots. We all enjoy the same glorious freedoms and we all salute the same great American flag.

You can watch and hear Trump’s entire inaugural address in the ABC News video below.

A Mixture of Both Conservative and Progressive Ideas

Although there is much in what Trump will attempt to accomplish  that would warm the cockles of any conservative (i.e. neoliberal or classical liberal) heart, there is also much to give a conservative pause.

There are more of Trump’s economic policies conservatives would find laudable than not. Nevertheless, those pieces conservatives find awful are very, very bad indeed, and are crucial for the economic survival of the government and for the well-being of the people. Let me begin with the least of these objectionable policies and proceed to the worst.

1. Infrastructure Spending: Trump has been advocating large increases in infrastructure spending as a Keynesian stimulus program for some time. Yet, according to the Federal Reserve, the national debt now stands at $19.6 trillion and the GDP (Q3 2016 annualized) at $18.7 trillion, making national debt currently 105 percent of GDP. Research by the economists Carmen Reinhart and Kenneth Rogoff has shown that once the national debt of a country exceeds 90% of GDP, the denial of economic assets to the private economy just to finance the national debt progressively decreases the growth of the economy. They conclude:
   Median growth rates for countries with public debt over roughly 90 percent of GDP are about one percent lower than otherwise; average (mean) growth rates are several percent lower.
   
   And of course the lower the GDP, the less the tax revenue of the federal government and the more it will have to add to the debt with deficit financing. This would appear to be a time where no new federal spending should be taken on, unless it is absolutely necessary. Nevertheless, with roads, bridges, and other infrastructure often in bad repair, an economic justification for such spending can be made. This is the least harmful of Trump’s bad ideas.
   
   
2. Trade Policy: Of greater consequence is Trump’s hostility toward foreign trade. The only neoclassical economic law that possesses a rigorous mathematical proof is Ricardo’s Law of Comparative Advantage. This law states that  if one country has a comparative advantage over another in producing a good, then if the country with the comparative advantage sells the good to the country without, then both countries profit from the trade. Comparative advantage means something slightly different than the selling country being able to produce the good at a lower cost. If that were the case, then the selling country would have both an absolute advantage as well as a comparative advantage. There are some cases where it costs the selling nation more to produce the good than is the case with the buying nation, but the buying nation’s consumers value the good far more than the selling nation’s consumers. If the selling nation sets a price higher than its cost producing the good and higher than at which its domestic consumers would buy it, but less than or equal to the price at which consumers would purchase it in the buying nation, then the selling nation has a comparative advantage.
   
   If China has a comparative advantage over the U.S. in producing an iPhone, then both the Apple Company and the Chinese producer will profit if the Chinese producer manufactures the iPhone and sells it to Apple. In all such cases the people employed in the United States by Apple would be far fewer than if Apple produced the iPhone in the United States. This situation is exactly the same in all international trades, and the only way to avoid it would be if all foreign trade were prohibited altogether.
   
   However, the way the system is supposed to work should actually increase the number of American jobs. By outsourcing production of the iPhone to China, Apple will save all of the capital that it would otherwise invest in producing the device. Apple is now free to turn that capital to producing far more profitable goods with which the U.S. does have a comparative advantage over other countries. For example, Apple might use that freed-up capital to produce software applications, or for some other use. The fact that the business climate in the U.S. is so poisonous and hostile to companies discourages those companies from making any investments at all. Trump and company would do far better to eliminate that hostile business environment (which in fact they intend to do. See below.) than to place punitive tariffs on imports. By placing trade barriers on imported goods, all the Trump administration would succeed in doing is to increase greatly the cost of goods for the American people.
   
   
3. No Cuts in Entitlement Spending: This is the most damaging of all Trump’s policies. In fact, it is highly unlikely any politician who promised to make cuts in Social Security or Medicare would ever be elected, which is probably the reason Trump has always been against cutting entitlement spending. People become justifiably angry if faced with the prospect of diminished Social Security or Medicare support in retirement. (Being 70 years young, I ought to know!) After all, retirees have payed for those benefits with their payroll taxes over all their working years.  However, what people do not realize is politicians have long since spent all of that  payroll tax revenue over the decades on other programs. What has replaced it are special issue treasury bonds that are not even negotiable on the open market. The only function they perform is as an accounting tool telling the government how much they owe to the entitlement funds. 
   
   Nowadays, when the Social Security Administration pays out benefits each month, payroll taxes are insufficient for making the payments. The government must then make up the shortfall with transfers from the general fund. Those transfers are huge and growing rapidly with time. In fact, if you look at the share of the budget taken up by the mandatory entitlements, which are mostly Social Security, Medicare, and Medicaid, currently those expenditures absorb about two-thirds of the federal budget, which I discussed in the post The Federal Government’s Projected Bankruptcy. In that post, I did a nonlinear least squares fit of exponential functions to two data series: the total revenue of the federal government and total mandatory entitlement expenditures plus interest on the national debt. I then extrapolated the two fitted curves to the year 2045. The result was the plot below.
   
   

   

   
   The total U.S. government revenue is represented by the green curve, and total entitlement expenditures plus interest on the national debt is represented by the blue curve. According to this picture, every single penny of government revenue will be absorbed by entitlements plus interest on the national debt by April, 2031. The only way the government can escape insolvency is by greatly reducing entitlement spending. Increasing taxes can not possibly solve the problem because doing that would reduce total investments in the economy, thereby reducing GDP. Since the empirical Hauser’s Law tells us total government revenues are always 19 percent of GDP (±3 percent) no matter what the tax rates, increasing the tax rates and reducing the GDP would actually reduce government revenues. The only possible solution is reducing entitlement spending. Yet, this is precisely what Donald Trump and any other politician refuses to do. Of course if they proposed it, they would never get elected.

However, unlike with Hillary Clinton and the Democrats, Trump has some economic policies that would actually be greatly useful, that would add to economic growth and jobs. These useful policies are of two types: (1) Large decreases in both individual and corporate tax rates, and (2) reductions in economic regulations. At the current time, the United States, with a top corporate tax rate (including state taxes) of 38.9 percent has the highest corporate tax rates in the world, with the exception of the United Arab Emirates. The average in the Euro zone is 24.3 percent, giving many European companies a tremendous competitive advantage. Trump has proposed lowering the top corporate tax rate down to 15 percent, making American companies internationally competitive again. In addition, he would substantially reduce individual taxes, and greatly simplify the tax structure.

Trump also proposes to severely prune economic regulations, including eliminating the most economically counterproductive parts of the Dodd-Frank Act. He has also promised to eliminate the EPA’s plan to eliminate carbon emissions by reducing fossil fuel production and use. All of these proposals would greatly reduce the costs of doing business for American companies.

How Can Trump Be Hostile To the Elites of Both Parties?

From the combative temper  exhibited in Donald Trump’s inaugural address, congressional leaders from both parties can expect a determined foe in Trump if they do not agree with his proposals. The Republicans would be largely sympathetic to Trump’s tax plan and his plan to reduce the regulatory state, but would not be so agreeable to a large Keynesian infrastructure stimulus. Also, Republicans have traditionally been free-traders and would likely resist the imposition of import tariffs. If Trump can sweeten the deals for trade pacts in some way, I suspect they would be more than agreeable, but making free-trade harder would be vigorously resisted.

Some Republicans, such as House Speaker Paul Ryan, but not all would encourage Trump to reconsider his stand against cutting entitlements. How such cuts could be sold either to Trump or to the American people is problematic. Yet, if such cuts are not made, I greatly fear the inevitable financial catastrophe.

Trump will first revoke the executive orders issued by Obama that he considers unwise with his own countermanding executive orders. Once that is done, there is very little he can accomplish without the cooperation of Congress. At that point this transaction oriented president will be in his element, seeking the best deals he can to meet his purposes. Two facts give me hope. First, the cabinet he has chosen is probably the most free-market oriented cabinet in modern history. By all accounts Trump listens well to expert advice, so one can hope the advice of his cabinet members will draw him away from any progressive proclivities he might have had in the past. Second, the GOP controls both the Senate and the House of Representatives, and any deals Trump makes is going to have to be with the Republican members of Congress.

The next four years are going to be both fascinating and very, very dangerous.

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