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Economic Effects of Trump’s Policies

The Republican Donald Trump is the 45th president of the United States. His first term is from 2016 to 2020. Over past two years, we can see significant changes in the US economy: the unemployment rate has dropped from 10% to 3,9 %, the stock market has jumped up to 27% and GDP is growing at a 3.4% plus rate. Trump’s plan focuses on “making America great again” and his idea was simple: as much money companies keep with themselves, it will bring more benefits to the economy and the state. It calls a trickle-down effect. The last complete tax cut in the United States occurred 30 years ago, under 40th President, Ronald Reagan, which stimulated economic growth.

President Donald Trump initiated and implemented a new tax reform. In December 2017, Congress reduced government revenues by approving tax cuts. The implementation of the law on tax reform will add to the existing public debt about 1.5 trillion dollars over the next 10 years. It is the law that provides for the possibility to annul tax breaks if the growth of the federal deficit exceeds this amount in any of the years during this period. Congress claimed the corporate tax cuts would benefit everyone because businesses would invest or use the tax cut to raise wages. This tax reform, which took effect on 1st of January 2018, entails a major overhaul of the US tax system. The reform involves large number of changes.

The Tax Cuts and Jobs Act passed in December was also touted as a way to create more jobs, drive U.S. economic growth and level the playing field with companies based outside the United States. Corporations are now paying significantly less taxes; it have decreased by $ 275 billion, since tax cuts were introduced less than a year ago. This means that corporations have additional funds — higher profits and lower taxes — that could potentially affect the increase in employee wages. It decreased the corporate income tax from 35 to 21 percent and charges multinationals a one-time tax on profits held overseas. The companies could plow more of the money saved from sweeping tax cuts into business investment later this year, perhaps even surpassing a jump in first-quarter capital expenditure that was the highest in almost seven years. If many companies invest then aggregate supply increase.

According to Trump’s plan, tax reform should encourage US corporations to increase investment, including by repatriating enterprises and making a profit, or some part of them. Companies in the IT sector that make extensive use of offshore schemes and concentrate profits abroad in order not to pay high taxes in the United States should carry out repatriation. If American corporations decide to transfer production and profits to the United States, their shareholders and the state will benefit through the tax system. For example, after signing the law on tax reform: the Boing Company announced an increase in the wages of its employees for a total amount of $ 300 million. Leaders of International Forest Products announced their intention to build a multi-paper mill in North Carolina that will create hundreds of jobs. Moreover, there are many of such examples.

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Fiscal policy and the aggregate demand. Price and output increases.

Aggregate Demand=C+I+G+X-M

Fiscal policy and aggregate supply. This increases output and decreases the price.

According to the President of the United States, migrants are taking jobs from Americans. That is the reason why he is making America isolated from Mexica by building a wall. In particular, Democrats believe that the construction of the wall on the southern border of the United States will result in exorbitant budget expenditures. This project will cost about $ 66.9 billion. Thus, everyone in the United States will pay more than $ 200 for the construction of the wall. The migration of the Mexican labor force in the USA is, in fact, a natural result of the close interaction of the two countries with different levels of economic development. A significant difference in living standards and wages is a major factor in the migration of people from Mexico to the United States. In addition, the neighborhood of the two countries is an additional incentive in this process.

Trump says, “We cannot allow all of these people to invade our Country. When somebody comes in, we must immediately, with no Judges or Court Cases, bring them back from where they came. Our system is a mockery to good immigration policy and Law and Order.” Obviously, Trump is seeking to increase the share of domestic products, reduce unemployment through the creation of new jobs and reduce the volume of imported goods. Inflation and unemployment are inversely related: inflation increases when levels of unemployment decrease.

It shows on diagram, when employment rate increase it leads to increase inflation and vice versa.

When aggregate demand is below the level required for full employment this known as deflation gap.

The U.S. recorded a deficit in trading goods with 102 countries globally, and China surplus in trade with 168 countries, at the end of 2017. China has a history of being dependent on the U.S., through the aggregate demand volume source for the products, which China produces of its export-concentrated economy. Nevertheless, simultaneously, America needs low-cost imports from China, in order to supply affordable goods for low-income American consumer base. Earlier on, Donald Trump suggested that American organizations expand manufacturing within the country opposed to expanding production in China, with the purpose of avoiding duty payments imposed by the U.S. on goods imported from China.

President Trump increased the import duties on goods from China up to $250 billion. Also, he announced new import taxes on steel, aluminum and solar energy panels, which concern other countries too. It is expected that taxes will generate a negative effect for other economies, industries and consumers. Taxing imported goods will increase the prices for consumers. Higher price equals smaller demand in quantity of products. This elaborates that, The U.S. will have an increase on the value of imports, which is identical to increasing tax on consumers. Furthermore, this indicates for China, the need to expanding export to other markets.

Initial idea is highly intuitive-with the increase of price for goods, manufacturers will be driven to supply more goods, however, consumers will drop in demand. Market equilibrium is defined by two of these groups matching up- the correct number of goods are traded at the correct price, so that supply precisely meets the demand.

A tariff contributes to a wage between supply and demand, which leads to increased price and reduced quantity.

Despite the tax cuts, the decline in immigration and GDP growth rate, America will face a big crisis in 2020. Domestic manufacturers will suffer because of new high prices. Retribution from other countries and trade war, which can negate any benefits from the tariff, as other countries increase tariffs on US goods and services, causing damage to domestic exporters.

References

  • Amadeo, K.  (2018) President Donald Trump’s economic plan.The Balance [online]. Available from: https://www.thebalance.com/donald-trump-economic-plan-3994106
    [Accessed 11.12.2018].
  • Cox, J.  (2018) Trump has set economic growth on fire. Here is how he did it. CNBC [online].
    Available from: https://www.cnbc.com/2018/09/07/how-trump-has-set-economic-growth-on-fire.html  [Accessed 03.12.2018].
  • Ghilarducci, T.  (2018) Who Benefits From The Tax Cut 10 Months Later. Forbes [online].
    Available from: https://www.forbes.com/sites/teresaghilarducci/2018/09/28/who-benefits-from-the-tax-cut-10-months-later/#7ea86cc826bb [Accessed 01.12.2018].
  • Griffiths, B. D.  (2018) Trump: ‘We cannot allow all of these people to invade our country’. Politico [online]. Available from: https://www.politico.com/story/2018/06/24/trump-invade-country-immigrants-667191 [Accessed 11.12.2018].
  • Kiersz, A. (2018) A simple chart from Econ 101 shows the basic problem with Trump’s new tariffs. Business insider [online]. Available from: https://www.businessinsider.com/donald-trump-tariff-a-chart-from-econ-101-shows-a-basic-problem-2018-3?r=US&IR=T [Accessed 09.12.2018].
  • Valetkevitch, C.  (2018) U.S. companies seen investing more in business this year after tax cuts. Reuters  [online]. Available from: https://www.reuters.com/article/us-usa-stocks-capex/u-s-companies-seen-investing-more-in-business-this-yr-after-tax-cuts-idUSKCN1II2WO [Accessed 06.12.2018].

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