New York
CNN
–
President Donald Trump, in a conversation with global business leaders on Thursday, gave the clearest picture yet of how he plans to deliver on the economic promises he campaigned on: He proposed a carrot-and-stick approach to the world economy that he believes it will help solve the inflation crisis for good and fund his massive tax cut proposals.
Trump spoke from Washington in live 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, encouraging companies to do business there.
- Raise taxes on businesses outside America, bringing in revenue that will pay for lost revenue from lower tax rates and spur more American manufacturing to grow the economy.
- Produce more oil to lower energy costs to beat inflation.
- Lowering interest rates to lower costs for businesses and consumers.
Although Trump has articulated various aspects of his plan during his campaign for president, he has never tied all of these themes together into a singular vision for solving everything that ails America’s economy, defeating high prices, high taxes, stagnant production, a sluggish labor market and interest rates all at the same time.
The problem, of course, is that Trump’s plan isn’t that simple to achieve — and, in fact, may be counterproductive.
Here’s Trump’s plan, step by step:
First step: Lower taxes. Trump says he will work with Congress to lower the corporate tax rate to 15% (from 21%). This, he says, would encourage business growth and investment in the United States.
Step two: Increase fees. The lower tax offer is only good for companies that make their stuff in America. If they want to continue doing business in the US while manufacturing products abroad, they will be subject to heavy 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’ll give you some of the lowest taxes of any nation on earth,” Trump said Thursday. “But if you don’t manufacture your product in America, which is your prerogative, then you’ll very simply have to pay a tariff.”
Trump predicted the tariffs would bring hundreds of billions of dollars — perhaps trillions — into the U.S. Treasury, which would help pay down America’s massive debt and his planned tax cuts. Taking a carrot-and-stick approach, Trump said he believes companies will be incentivized to make products in America, boosting American manufacturing and its workforce 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 boost U.S. oil and gas production. Combined, Trump believes these actions will lower energy prices, leading to lower overall prices for American consumers.
Step four: Lower interest rates. Lower inflation could allow the Federal Reserve to cut interest rates, which Trump said he would ask America’s central bank to do.
“With the drop in oil prices, I’m going to ask that interest rates go down immediately,” which would lower borrowing costs for businesses and consumers.
Parts of Trump’s plan have some high-profile supporters: namely JPMorgan CEO Jamie Dimon, head of the world’s largest bank. Dimon in Davos on Wednesday told CNBC that tariffs can be an effective economic tool — or weapon.
“I would put it 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 of tariffs, which Trump has often threatened as part of his negotiating tactics. But his full vision may 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.
Cutting the corporate tax rate is expensive. Trump did it before, in 2017, raising the top corporate rate to 21% from 35%. While that gave the economy a boost, boosting wages and productivity, the gains weren’t nearly enough to offset losses in tax revenue that have widened the U.S. deficit, according to an analysis by the Booth School of Business in Chicago.
Everyone wants lower taxes. But America is running a huge deficit, which is making popular social services, including Social Security and Medicare, increasingly financially troubled. To finance these services and the rest of the business the government does, America must borrow large amounts of money in the form of Treasury bills.
The problem with bonds: The more you flood the market with them, the more their price falls. And yields — which are tied to all kinds of consumer credit rates, including mortgages — rise. Trump’s massive borrowing promises are a big factor behind mortgage rates reversing their decline and rising above 7% even as the Federal Reserve has cut its interest rates in recent months.
Tariffs are also potentially problematic: Their costs are paid by US importers, not foreign exporters. That means those costs are passed on to American consumers, which could reignite inflation and hurt the economy.
“I think his economic policies are crazy. There are reasons why we don’t have super high rates,” said James Angel, a professor at Georgetown McDonough’s Psaros Center for Financial Markets and Policy. “For one thing, they stifle world trade. If you stifle imports, you stifle our ability to export and that will cause a lot of job losses.”
Energy demand is decreasing: It will be difficult to pump more oil. Demand is weak around the world as economies – particularly China – struggle with inflation and sluggish growth.
Meanwhile, the United States is already producing more oil now than any other country at any other time. Energy companies aren’t looking for new leases to drill for oil, as evidenced by the recent drilling auction for a wildlife refuge in Alaska that received zero bids.
And even if OPEC lowers prices, then Saudi oil revenues 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.
Cutting interest rates is the job of the Fed, not the president: The central bank strongly maintains its independence. Trump has previously aired his desire to exercise more direct control over interest rate movements and has called on Jerome Powell, the Fed chairman whom Trump appointed in his first term, not to cut rates sooner of interest. Amid speculation that Trump will try to fire Powell — a rumor Trump has repeatedly denied — the Fed chief drew a hard line, telling reporters in no uncertain terms that such a move “was not allowed according to the law”.
It’s not as if no one has tried to point out Trump’s leaps of logic and apparent misreading of his Econ 101 book. Over the summer, at the Economic Club of Chicago, Trump simply refused to admit that his tariff plans would raise costs for consumers, telling Bloomberg News Editor-in-Chief John Micklethwait that his critics “have been wrong about everything. So are you, by the way, wrong… You’ve been wrong all your life about this matter.”