January 20, 2017

What does a Trump presidency really mean for the US economy?

What does a Trump presidency really mean for the US economy?

The incoming Trump administration’s proposed fiscal and tax plans could trade a short-term economic boost for longer-term inflation and debt problems, caution Federal Reserve officials.

While Federal regional bank presidents appear to agree in principle that fiscal stimulus, tax reduction, spending on infrastructure, and lighter regulation—policies President Trump may pursue—will increase economic growth, through direct spending, there are concerns that a US economy that is currently performing quite well does not really need such short-term assistance.

Instead, according to Chicago Federal Reserve President Charles Evans, it needs longer-term strategies to expand a labor force constrained by issues like population aging and lagging productivity.

Whilst Federal Reserve officials are generally cautious about preserving their impartiality in order to fulfil their role of setting independent monetary policy, since the election they have extended some subtle guidance. For example, whilst efforts to simplify or reform the business tax code and clarify or reduce some regulations could make the economy operate better, officials believe a trade war or massive new deficit spending are unwanted risks.

Dallas Fed President Robert Kaplan has also suggested that the repeal of Obamacare could hurt consumers’ willingness to spend, whilst the answer to the drag that population aging has on economic growth could lie in expanded immigration, both of which are counter to the policies Trump advocated as a presidential candidate.

In her IZA World of Labor paper on the impact of immigrant labor on native workers, Amelie F. Constant recognizes that migrants have a role in creating new jobs by increasing production, engaging in self-employment, and easing upward job mobility for native workers. Migrants often complement native workers or accept jobs that natives don’t want or can’t do, and Constant argues that this complementarity leads to great and more efficient production and to economic growth, making all consumers and the national economy better off.

Related articles:
Do migrants take the jobs of native workers?, by Amelie F. Constant
International trade regulation and job creation, by L. Alan Winters
How responsive is the labor market to tax policy?, by Richard Blundell