Listen to President Trump describe how he will make America great again. He will deport illegal migrants; cut corporate taxes; build a wall and make Mexico pay. He will punish companies that move jobs abroad; stand up to China’s trade juggernaut; deregulate the economy; and end environmental protection. This is a world mainly of shortcuts: raising national income not by innovation, skill, and saving, but by grabbing income from somewhere else, such as Mexico, China, the environment, or future generations. Trump is the quintessential short-run populist. History teaches why such populism is doomed to fail.
The ostensible motivation for Trump is faster economic growth and more jobs for working-class Americans. Properly viewed, these are long-term challenges requiring a long-term national strategy. The nation’s output depends on the productive assets in the economy, defined broadly to include the skills, intellectual know-how, roads, ports, factories, air, water, and even trust in the society that underpin commerce and finance. Economists call these assets the “capital” of the economy, including human capital (education, job skills, health); infrastructure capital (roads, power, fiber, rail); natural capital (air, water, soils, biodiversity, climate); intellectual capital (know-how); and social capital (trust). Long-term improvements in the economy depend on building the capital stock in these areas in a balanced and thoughtful way.
With the ongoing brilliant advances in technology; improved ways to impart skills to young people; smart infrastructure such as intercity fast rail and self-driving vehicles; environmental safety through the mass deployment of renewable energy; and a fairer income distribution to rebuild social trust, the American economy could indeed make substantial progress and raise future well-being.
A key policy step would be to boost national saving by increasing taxes on capital income, carbon emissions, and consumption spending in order to boost public-sector saving and investment in infrastructure, skills, and technology. Barack Obama talked about this approach but didn’t implement it. He never presented a plan or budget along these lines, even in the early days when he had Democratic majorities in both houses of Congress.
Trump’s populism is generally the opposite of this approach. It is the art of the gimmick and the bullying. “We will have more because you (the ‘other’) will have less,” thinks the populist, even if never being quite so explicit in public rhetoric. The populist aims to achieve short-term success through gimmicks rather than long-term saving and investment, telling his followers that the short-term gains will make possible even greater glory in the future. The problem is that gimmicks are gimmicks, while long-term progress is hard won through persistent saving, investment, R&D, and vision. Trump’s particular brand of populism, indeed, may be even more fleeting than usual.
Almost 30 years ago, while working to end hyperinflations in Latin America, I made a study of Latin American populism. I tracked how short-term promises ended up as long-term disasters in what I termed the “populist cycle,” something like the business cycle but politically caused. In the case of Latin American populists, like Argentina’s Juan Peron and Venezuela’s Hugo Chavez, their trick was to grab the government’s financial assets and cash flow, and rather than invest it in the future, to distribute it among their followers in cash benefits, higher wages, and expanded public services.
Some of these short-term benefits can be real. The problem is paying for them in the long-term. Over time, the public sector loses its cash reserves and builds up debt. Eventually the debt comes due and no new creditors are ready to lend the government more funds. When the creditors demand repayment, there are no funds available. The government starts printing money, inflation soars, and the debt is defaulted. Post-Chavez Venezuela is essentially in that condition today.
Trump is looking for the short-term miracles to give quick gratification to his followers and carry him to reelection in 2020. Like Peron and Chavez, he’ll try to grab what he can, both from foreigners and from future generations. He wants to crow about short-term gains. The question is how far he’ll get and what mess he will leave behind.
He isn’t getting very far with Mexico. His demand that Mexico build and pay for a border wall was met with an emphatic no. Then came the suggestion that Trump would slap on a tariff to pay for it, as part of corporate tax reforms. Many businesses operating in Canada and Mexico have expressed strong opposition to such a border tax, as have many major American retailers, such as Walmart, and US manufacturers that depend on imported inputs. Meanwhile, Trump has pressured American companies to invest in the United States rather than in Mexico, another kind of grab from Mexico, but aside from winning some headlines, it’s hard to believe that the results will reach any meaningful scale in US jobs created.
The attempt to grab benefits from China looks to be even shorter-lived and less successful. The administration arrived in office boasting of the coming trade wars with China. Trump would wrong-foot China through multiple pressures on trade, foreign policy, and defense, and then negotiate a winning trade deal to America’s advantage. The new president quickly picked up the phone with Taiwan’s president, boasting that the United States no longer had to abide by the old “one-China” policy. Trump hired a protectionist team to flaunt his willingness to get tough on trade with China. He spoke about winning a new trade war and a new arms race.
Yet within two weeks, that idea balloon was deflated when the White House announced that the United States would indeed abide by the one-China policy. China’s President Xi Jinping made clear that if the United States turned protectionist, China would continue to lead in free trade. And if the United States cut its support for multilateralism at the UN and elsewhere, China would be pleased to help support the multilateral order. It won’t be so easy, after all, to bully China. China’s economy is now larger than America’s; China is a major consumer of American goods that could easily be shifted elsewhere (buy Airbus rather than Boeing). And China is America’s creditor, holding hundreds of billions of dollars of American financial assets and helping to finance America’s chronic budget deficits.
Trump’s grab for short-term income does not end with Mexico and China. The tax reform proposals are similarly conceived. Trump is trying cut corporate taxes in order to shift investments from the rest of the world to the US economy, cutting investments and jobs abroad while boosting them in the United States. It is claimed that the United States heavily overtaxes its companies so that such a tax cut makes sense. Yet there are three limitations with this approach.
First, America’s over-taxation is exaggerated, because many detailed provisions of the tax code (such as accelerated depreciation, deductions for US-based production, expensing of R&D, and the deductibility of interest payments on corporate debt) lower the effective marginal tax rate on capital below the “headline” rate of 35 percent. And only some industries are mobile enough across borders to be highly sensitive to international differences in corporate tax rates. Cuts in the headline corporate tax rate from 35 to 20 percent would probably have much a modest effect on production, and even less on jobs, compared with the extravagant claims of Trump and the lobbyists.
Second, the other countries would certainly respond to US corporate tax cuts with a new round of cuts of their own. We are already in a global “race to the bottom” in corporate taxation, as each country cuts its corporate tax rate to entice internationally mobile companies to the home shores. All of the competing countries could end up with near-zero corporate tax rates as a result, unless we are wise enough to cooperate with the other countries to stop the race to the bottom.
Since the US marginal tax rates are currently slightly higher than abroad, there might be a small net gain in investment for the United States if all countries indeed go to zero, but any such benefits would be very small compared with the naïve assumption that other countries won’t retaliate. Moreover, substantial tax revenues would be lost in the process, with the benefits flowing overwhelmingly to the super-rich (no surprise there).
Third, the loss of corporate tax revenues will need to be paid for somehow, a point that populists like Trump try to evade. His hidden reasoning might be simple: he doesn’t pay taxes so why should anybody else? Trump will not offset the proposed tax cuts with spending cuts, such as on the military or over-priced medicines bought under federal plans; indeed, he will propose large spending increases on infrastructure and the military.
The Trump plan is to finance the tax cuts mainly by increased budget deficits. That’s a hidden way of making today’s young people pay for tax cuts for old and rich capitalists, the ones who are enjoying the soaring stock market that is anticipating the coming tax cuts. It is the young — the millennials — who would be paying higher taxes during their lifetimes to service the mountain of public debt that Trump would leave behind.
If Trump won’t be able to grab income so easily from Mexico, from China, and from other competitor nations, will he get away with grabbing wealth from today’s young people? This is probably the central question that Republicans will soon confront. Deficit hawks within the Republican Party may well push back. Trump will claim that the tax cuts will pay for themselves through booming economic growth, just as President Ronald Reagan deceptively promised 36 years ago. We must remember that Reagan’s tax cuts led to enormous budget deficits; so would Trump’s. Promises of tax cuts that pay for themselves are the essence of populism that ends very badly.
Trump has spied one more place to grab some income in the short term, and that is from natural capital. His first infrastructure projects, it seems, will be oil and gas pipelines to boost fossil-fuel production and thereby worsen global warming. By running down the Earth, ruining the climate, and despoiling the air and water, Trump aims to grab one more round of profits for his friends in the coal, oil, and gas sectors. He does this in the name of the mining workers, but the entire mining sector employs less than 1 percent of the workforce, and the benefits of environmental deregulation will flow overwhelming to the wealthy owners of the capital-intensive oil and gas sector.
Trump’s anti-environmental populism — destroying the Earth’s natural capital for a trickle of gains today — is perhaps the most insidious and irreversible of all of his populist ploys. Mexico can answer back; China can put its foot down; other countries can plan to match the United States in tax cuts. But who will speak up for the Earth? Who will speak up for our children and grandchildren who would inherit a degraded planet? That will have to be the job for all of us.
Jeffrey D. Sachs is University Professor and Director of the Center for Sustainable Development at Columbia University, and author of “The Age of Sustainable Development.”