INNOVATION RULES // RICH KARLGAARD
Trump’s economic road map.
The big shock of Trump’s young presidency: He’s mostly doing what he said he’d do.
But of course Trump has said a lot of things. Detecting a clear signal amid the din of his tweets and media howls might seem daunting. But step back. You can find Trump’s economic plan described clearly in a September 2016 white paper written by Wilbur Ross, Trump’s choice for commerce secretary, and trade advisor Peter Navarro. The paper is titled “Scoring the Trump Economic Plan: Trade, Regulatory and Energy Policy Impacts.” Google it and dive in.
For a quickie version, I’ve edited and paraphrased it below.
• The “New Normal” is a political excuse for poor growth. From 1947 to 2001 the nominal U.S. GDP grew at an annual rate of 3.5%. But from 2002 to today that average has fallen to 1.9%. This loss of 1.6 percentage points in real GDP growth represents a 45% reduction in the U.S. growth rate from its historic, pre-2002 norm.
Just why did the U.S. growth rate fall so dramatically? Many economists have described this era of slower growth as the “new normal.” They blame the plunge at least in part on demographic shifts, such as a declining laborforce participation rate and the movement of Baby Boomers into retirement.
That’s a defeatist view. There is nothing inevitable about poorly negotiated trade deals, overregulation, a high tax burden and bad energy policy. This is a politician-made malaise; therefore, nothing about the new normal is permanent.
• Fix trade, regulation, taxes and energy—in that order. Bad policies push capital investment offshore or discourage onshore investment. This “offshoring drag” subtracts directly from GDP growth. Each additional point in real GDP growth translates into roughly 1.2 million jobs. When the U.S. economy grows at a rate of only 1.9% annually instead of its historic norm of 3.5%, we create almost 2 million fewer jobs a year.
• Excessive regulation is killing business. More than 80% of CEOS of large U.S. companies agree. They say U.S. 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 postrecession job growth, yet have been hurt even more. Small-business compliance costs are excessively high.
The Heritage Foundation and the National Association of Manufacturers (NAM) have estimated regulatory costs to be in the range of $2 trillion annually—about 10% of our GDP. NAM finds that “small manufacturers face more than three times the burden of the average U.S. business.”
In just eight years the Obama Administration added regulations—environmental, labor, banking and consumer protection—that added $120 billion in annual compliance costs. Those costs, like all business costs, are passed along to consumers, who must pay more for products and services. According to the Competitive Enterprise Institute, this “hidden tax” of regulation amounts to “nearly $15,000 per U.S. household” annually.
• Manufacturing has the best wealth- and job-multiplier effect. Note that the Trump regulatory reform plan will disproportionately—and quite intentionally—help the manufacturing sector. This is the economy’s most powerful sector for driving both economic growth and income gains. These income gains will, in turn, inordinately benefit the nation’s blue-collar workforce.
This high-multiplier effect is precisely why the Trump trade doctrine and overall economic plan seek to strengthen the U.S. manufacturing base—and regulatory reform is a key structural reform. Right now, as Mark and Nicole Crain calculate: “The costs of federal regulations fall disproportionately on manufacturers. . . . Manufacturers pay $19,564 per employee on average to comply with federal regulations, or nearly double the $9,991 per employee costs borne by all firms as a whole.”
Since the era of globalization, manufacturing as a percentage of the labor force has steadily fallen from a peak of 22% in 1977 to about 8% today. To those who would blame automation for the decline in manufacturing, one need only look at two of the most technologically advanced economies in the world: Germany and Japan. Both are world leaders in robotics. Despite declines in recent years, almost 20% of Germany’s workforce is still employed in manufacturing, and almost 17% of Japan’s.
To be clear, when we’re talking about manufacturing, we’re not just talking about cheap T-shirts and plastic toys. We’re talking about aerospace, biomedical equipment, chemicals, computer chips, electronics, engines, motor vehicles, pharmaceuticals, railroad rolling stock, robotics, 3-D printing, resins, shipbuilding and more.
So there you have it. Trump’s tax, energy and currency plans are also described. But in Trump’s eyes, trade and regulation are the main events. Like Trump’s vision or not, his road map is clear. And thus far in his presidency, Donald Trump has proven he means to follow it.