Can Trump's Economic Plan Jump-Start GDP Growth?

1. President Trump’s Economic Plan Promises 3-4% GDP Growth

2. Manufacturing Has the Best Job-Multiplier & Income Effect

3. Economic Policies Similar to Trump’s Have Worked Before

4. Trump’s Economic Plan vs Obama’s & the Media’s Reaction

5. Productivity Can Rebound if Policy Environment is Right


President Trump promises that his economic plan, if enacted, will result in 3-4% annual GDP growth. Yet I get the feeling most Americans don’t understand Trump’s economic plan. Maybe that’s because the mainstream media has criticized it at every turn, even though similar plans have jump-started the economy in the past – think Ronald Reagan.

Today we’ll take a closer look at Trump’s economic plan as outlined in a detailed report his team released last fall. Essentially, his economic plan is based on tax cuts for individuals and corporations, a regulatory rollback and significant infrastructure spending, among others.

Yet the mainstream media and even some respected economists say the plan has no chance of working and further, that it would explode federal budget deficits. As always, it depends on how the policies are implemented and how they’re paid for. Let’s get started.

President Trump’s Economic Plan to Reach 3-4% GDP Growth

I get the impression that many (if not most) Americans don’t understand what Donald Trump’s economic plan is. That’s understandable since Mr. Trump said many different things about his economic plan during the campaign.

The questions that we as investors need to answer are three-fold: 1) What is Trump’s economic plan; 2) Can it get us to 3-4% GDP growth; and 3) Will Congress cooperate and pass the laws (tax cuts, etc.) needed to implement the plan? I’ll try to sort it out for you today.

I think the clearest summary of Trump’s economic vision surfaced last September in a research report written by Wilbur Ross, Trump’s choice for Commerce Secretary, and Trade Advisor Peter Navarro. The report is titled “Scoring the Trump Economic Plan: Trade, Regulatory and Energy Policy Impacts.” Here are the highlights, beginning with the opening presuppositions.

The “New Normal” is a Political Excuse for Weak Growth. A gaggle of well-known economists seem to have settled on the term ‘New Normal’ to describe the lackluster growth in the US economy over the last decade or so.

From 1947 to 2001, the nominal US GDP (not adjusted for inflation) grew at an annual rate of 3.5%. But from 2002 to today, that average has fallen to just 1.9%. This loss of 1.6 percentage points in real GDP growth represents a 45% reduction in the US growth rate from its historic pre-2002 norm.

The question is, why did the US growth rate fall so dramatically? Many economists blame the plunge in large part on demographic shifts, such as the declining labor-force participation rate, the movement of Baby Boomers into retirement and the decline in worker productivity.

These so-called experts tell us these trends are likely irreversible, and that we are doomed to such sluggish economic growth indefinitely, if not permanently. That’s a defeatist view, and I beg to differ! There is nothing inevitable about overregulation, higher tax burdens, anti-small business policies and poorly negotiated trade deals.

With the exception of our aging population, these are problems that can be reversed, in my opinion. For the most part, this is a politically-made malaise, and therefore, very little about the New Normal has to be permanent.

Reduce Regulation, Lower Taxes & Encourage Trade in That Order. Bad policies push capital investment offshore and discourage onshore investment. This so-called “offshoring drag” subtracts directly from GDP growth. Each additional point in real GDP growth translates into roughly 1.2 million jobs per year. When the US economy grows at a rate of only 1.9% annually instead of its historic norm of 3.5%, we create almost two million fewer jobs a year.

Excessive Regulation is Killing Business. More than 80% of CEOs of large US companies agree. They say US business regulations are among the worst in the developed world. The situation is even worse for America’s 28 million small businesses. They have provided two-thirds of our post-recession job growth, yet have been hurt even more. Small-business compliance costs are excessively high.