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President Donald Trump, in a conversation with global business leaders Thursday, provided the clearest picture yet about how he plans to deliver on the economic promises he campaigned on: He proposed a carrot-and-stick approach to world economics that he believes will help solve the inflation crisis for good and fund his massive tax cut proposals.
Trump spoke from Washington in live-via-satellite remarks and a question-and-answer session held by the World Economic Forum in Davos, Switzerland, laying out a vision for American economic prosperity:
- Lower taxes within America’s borders, incentivizing companies to do business there.
- Raise taxes on businesses outside of America, bringing in revenue that will both pay for the lost proceeds from lower tax rates and drive more American manufacturing to grow the economy.
- Produce more oil to lower energy costs to defeat inflation.
- Lower interest rates to reduce costs for businesses and consumers.
Although Trump has articulated various aspects of his plan throughout his campaign for president, he never tied all these themes together into a singular vision to solve all that ails America’s economy, defeating high prices, high taxes, manufacturing stagnation, a slowing job market and high interest rates all at the same time.
The trouble, of course, is that Trump’s plan is not so simple to achieve and, in fact, may be counterproductive.
Here’s Trump’s plan, step by step:
Step one: Lower taxes. Trump says he will work with Congress to lower the corporate tax rate to 15% (down from the current 21%). That, he says, would ignite business growth and investment in the United States.
Step two: Raise tariffs. The lower-tax offer is good only for companies that make their stuff in America. If they want to continue doing business in the US while making products abroad, they’ll be subject to hefty penalties in the form of tariffs.
“My message to every business in the world is very simple: Come make your product in America and we will give you among the lowest taxes of any nation on Earth,” Trump said Thursday. “But if you don’t make your product in America, which is your prerogative, then very simply you will have to pay a tariff.”
Trump predicted the tariffs would bring in hundreds of billions of dollars – perhaps trillions of dollars – into the US Treasury, which would help pay down America’s massive debt and his planned tax cuts. With a carrot and stick approach, Trump said he believes companies would be incentivized to make products in America, boosting US manufacturing and its labor force and thereby growing the economy.
Step three: Lower energy costs. Trump said he believes he can make a deal with OPEC, the oil cartel, which has slowed production to keep prices higher. And he has signed executive orders to bolster US oil and gas production. Combined, Trump believes those actions would reduce energy prices, leading to lower overall prices for American consumers.
Step four: Lower interest rates. Reduced inflation could allow the Federal Reserve to lower interest rates, which Trump said he would demand of America’s central bank.
“With oil prices dropping I’ll demand interest rates will drop immediately,” which would reduce borrowing costs for businesses and consumers.
Parts of Trump’s plan have some high-profile proponents: namely JPMorgan CEO Jamie Dimon, the leader of the world’s largest bank. Dimon at Davos on Wednesday told CNBC that tariffs can be an effective economic tool – or weapon.
“I would put in perspective,” Dimon told CNBC’s Andrew Ross Sorkin in an interview. “If it’s a little inflationary, but it’s good for national security, so be it. I mean, get over it.”
That may be true for tariffs, which Trump has often threatened as part of negotiating tactics. But his full vision could be very difficult to realize.
There are many holes in Trump’s logic, as economists and policy experts across the political spectrum have noted for years.
Slashing the corporate tax rate is expensive. Trump did it before, in 2017, bringing the top corporate rate to 21% from 35%. While that did give the economy a boost, raising wages and productivity, the benefits were not nearly enough to offset the losses in tax revenue that have widened the US deficit, according to an analysis from Chicago’s Booth School of Business.
Everyone loves lower taxes. But America is running up an enormous deficit, which is making popular social services, including Social Security and Medicare, increasingly troubled financially. To fund those services and the rest of the business the government does, America needs to borrow enormous sums of money in the form of Treasury bonds.
The problem with bonds: The more you flood the market with them, the more their price falls. And yields – which are pegged to all kinds of consumer loan rates, including mortgages – go up. Trump’s massive borrowing promises are a huge factor behind mortgage rates reversing their decline and rising above 7% even as the Federal Reserve has been cutting its benchmark interest rates in recent months.
Tariffs also are potentially problematic: Their costs are paid by American importers, not by foreign exporters. That means those costs get passed onto American consumers, which can reignite inflation and hurt the economy.
“I think his economic policies are insane. There are reasons why we don’t have super-high tariffs,” said James Angel, a professor at Georgetown McDonough’s Psaros Center for Financial Markets and Policy. “For one thing, they choke off world trade. If you choke off imports, you choke off our ability to export, and that’s going to cause a lot of job losses.”
Energy demand is in a slump: It will be hard to pump more oil. Demand is weak around the world, as economies – particularly China – struggle with inflation and slow growth.
Meanwhile, the United States is already producing more oil now than any other country at any other time. Energy companies are not clamoring for new oil drilling leases, as evidenced by Alaska’s recent wildlife refuge drilling auction receiving zero bids.
And even if OPEC lowers prices, then Saudi oil revenue will fall, making it harder for the country to invest the $600 billion to $1 trillion in America that Trump says he is negotiating with the Crown Prince.
Lowering interest rates is the Fed’s job, not the president’s: The central bank guards its independence fiercely. Trump has previously broadcast his desire to exert more direct control over interest rate moves and has called out Jerome Powell, the Fed chair Trump appointed in his first term, for not lowering interest rates faster. Amid speculation that Trump would try to fire Powell – a rumor Trump has repeatedly denied – the Fed chief drew a firm line, telling reporters in no uncertain terms that such a move was “not permitted under the law.”
It’s not as if no one has tried to point out Trump’s logical leaps and apparent misreading of his Econ 101 textbook. Over the summer, at the Economic Club of Chicago, Trump simply refused to accept that his tariff plans would increase costs for consumers, telling Bloomberg News Editor-in-Chief John Micklethwait that his critics have “been wrong about everything. So have you, by the way, you’ve been wrong … You’ve been wrong all your life on this stuff.”
