by Ray Keating
Way back in 1970, the late Nobel Prize-winning economist
Milton Friedman wrote, “I have been impressed time and again by the
schizophrenic character of many businessmen. They are capable of being
extremely farsighted and clearheaded in matters that are internal to their
businesses. They are incredibly shortsighted and muddleheaded in matters that
are outside their business but affect the possible survival of business in
general.”
This phenomenon has only spread over the past 45-plus years.
We now are constantly berated by corporate executives and high-profile
investors saying things about the economy and public policy that make absolutely
no economic sense. These leaders in business turn out to be economic
illiterates.
Unfortunately, one of these economic illiterate businessmen
just happens to be leading the race for the Republican presidential nomination
in 2016. Of course, I speak of businessman and reality TV star Donald Trump.
It’s not easy figuring out how Trump came to rise and stay
atop the GOP field. But to a significant degree, the Trump train keeps chugging
along due to the fuel of populism. Specifically, Trump has played on or ginned
up people’s fears, in particular, irrational fears of foreigners. After all,
Trump is the guy who is going to fix “bad trade deals,” apparently by imposing
massive tariffs on products from nations with which we run trade deficits, like
Mexico, China and Japan. Trump also plans to create a “deportation
force” to move 11-12 million illegal immigrants out of the nation.
While this might be classic populist politics, it’s also
classically wrongheaded populist economics. Trump misses simple economic facts.
For example, in the U.S., periods of higher economic growth usually
coincide with shrinking trade surpluses or mounting trade deficits, while
economic slowdowns and recessions coincide with declines in trade deficits. The
U.S. trade deficit shrank dramatically during the 2007-2009 recession, declined
during the slowdown and recession in 1990-91, and during the economic woes of
1979 to 1982, the trade deficit not only declined, but shifted to a surplus
during two of those years. Indeed, the surest way to “cure” a trade deficit is
with a recession.
For good measure, the last time the U.S. went down the path
of protectionism, it did not turn out well, to say the least. As a result of
protectionist tariff measures passed in 1921 and 1922, and, most egregiously,
the Smoot-Hawley Tariff Act of 1930, trade declined. Most egregious, the
Smoot-Hawley measure triggered the Great Depression. It took decades for trade
to regain previous levels.
Make no mistake, free trade – that is, reducing governmental
barriers and costs to trade – is a positive for economic growth; for increased
opportunity for U.S. entrepreneurs, small businesses and workers; as well as
for expanding choices and reducing costs for U.S. consumers.
And trade is increasingly important to the U.S. economy. From 2000 to 2015, for example, the growth in
real U.S. exports equaled 22.5 percent of the growth in real GDP, and the
expansion in real total trade (i.e., exports plus imports) came in at 41.6
percent of real GDP growth. Also, consider that in 1950, U.S. exports equaled
4.2 percent of GDP, and imports registered 4 percent, while in 2015, exports
had jumped to 12.6 percent of GDP, and imports to 15.5 percent of the U.S.
economy.
Donald Trump misses
all of this, apparently.
As for immigration, few disagree that the current system,
which allowed for 11-12 million people to be in the nation illegally, needs to
be fixed. Indeed, respect for the rule of law demands immigration reform. At
the same time, it must be recognized that most immigrants – both legal and illegal
– come to this nation seeking a better life, and they contribute as workers,
business owners and consumers. For good measure, immigrants also benefit the
economy by overwhelmingly doing work that is complementary to the native born.
Given these economic realities, the Trump agenda of tariffs
and deportation would inflict serious harm on the U.S. economy.
On trade, American Action Forum, a free enterprise group,
has estimated
that Trump’s plan for imposing significant tariffs on imports from China and
Mexico would hit U.S. consumers with $250 billion in annual costs.
For good measure, the U.S. Chamber of Commerce has
projected that the Trump tariffs on China and Mexico would bring about a
significant recession: “The U.S. recession would set in within the first year
under Trump’s proposed
trade policies, which include a 35 percent tariff on imports from Mexico
and a 45 percent tax on goods coming in from China. Over the next three years,
the U.S. economy would shrink by 4.6 percent and the unemployment rate would
nearly double to 9.5 percent.”
As for the Trump – as well as Senator Ted Cruz – deportation
agenda, the story for the economy gets even worse. The American Action Forum offers
the following points and estimates:
• To deport all illegal immigrants in the nation in two
years, as Trump proposes, the federal taxpayer costs would be massive. These
would include federal immigration
apprehension personnel increasing from 4,844 positions to 90,582 positions;
the number of immigration detention
beds jumping from 34,000 to 348,831; immigration courts rising from 58 to 1,316; and the number of federal attorneys legally
processing undocumented immigrants increasing from 1,430 to 32,445.
• As for the economic costs, they are even more frightening.
AAF reports: “The result is a sudden and deep recession similar to what the
United States recently experienced during the Great Recession. Let’s say that
full immigration enforcement starts at the beginning of 2017 and the U.S.
government successfully removes all undocumented immigrants by the end of 2018.
At the end of 2018, the labor force would be 6.4 percent smaller than if the
government had not removed those immigrants. Relative to CBO baseline
projections, the labor force would decrease by 10.3 million workers. As a
result, the labor force would fall to its lowest level since 2006. In addition,
the labor force participation rate would fall from about 62.3 percent to 60.7
percent, the lowest level since the 1970s. The steep decline in the labor force
would cause the economy to decline sharply. At the end of 2018, the economy
would be 5.7 percent smaller than it would be if the government did not remove
all undocumented immigrants. For purposes of comparison, note that the decline
in real GDP during the Great Recession was quite similar – 6.3 percent. This
suggests that real GDP would be about $1 trillion lower in 2018 than CBO’s
baseline estimate, wiping out all economic growth that would have occurred
during the previous three years.”
The most likely outcome of the Trump tariff and deportation
agenda? A huge recession.
None of this should be surprising to anyone who understands
the economics and history of both trade and immigration.
But maybe Trump has an excuse. After all, his business
career seems to be best known for four high-profile business bankruptcies in a
span of 18 years. Milton Friedman was bewildered by businessmen being
“farsighted and clearheaded” in their own businesses but “shortsighted and
muddleheaded” on matters outside their business. It can be argued that Trump is
shortsighted and muddleheaded on matters both inside and outside his
businesses.
______________
Mr. Keating is an
economist and novelist who writes on a wide range of topics. His Pastor Stephen
Grant novels have received considerable acclaim, including The River: A Pastor
Stephen Grant Novel being a finalist for KFUO radio’s Book of the Year 2014,
and Murderer’s Row: A Pastor Stephen Grant Novel winning Book of the Year 2015.
The Pastor Stephen
Grant Novels are available at Amazon…
