This week the race for president of the United States ended with an upset win for Donald Trump over Hillary Clinton. The results were close—Mr. Trump won the Electoral College 279 to 228, but Mrs. Clinton narrowly won the popular vote by just over 200,000 votes out of 119 million votes cast. Mr. Trump campaigned on a few broad themes, including cracking down on immigration, tearing up U.S. trade deals, and bringing jobs back to the U.S., particularly in manufacturing. Now the question is how Mr. Trump will turn these ideas into actual government policy, especially on the economic front.
Throughout his 17-month campaign for the White House, Mr. Trump made many promises but provided few details on how he would achieve them. In September 2016, he gave a policy speech to the Economic Club of New York where he presented some of his economic plans. One of the headline promises from this speech was his plan to increase U.S. economic growth to at least 3.5%. Since the “great recession” of 2008-2009, economic growth has been slow to recover, with annual economic growth averaging just 2.2% over the last six years. This compares to a post-WWII average of 2.9%; looking back at the last eight decades, we have not seen a decade with growth of 3.5% or higher since the 1960s. No details have been presented on how we would achieve these high growth numbers, but the assumption is that Mr. Trump’s plans for reducing regulation and lowering taxes would get us there.
With respect to changing tax policy, Mr. Trump’s plan would reduce the seven individual tax brackets that we have now to just three: 12 percent, 25 percent, and 33 percent. He also proposes significant reductions in corporate taxes, all of which are in line with tax plans proposed by congressional Republicans. However, Mr. Trump is at odds with his party on the topic of international trade. The Republican Party has traditionally supported open trade, but Mr. Trump has said that on his very first day in office that he will announce his intention to renegotiate NAFTA or withdraw from the deal entirely. While most major changes to trade policy need to go through Congress, the president does have the power to unilaterally impose tariffs in certain circumstances.
Regarding job growth, Mr. Trump claims that his economic plan would create 25 million American jobs over 10 years, implying 2.5 million jobs would be added on average per year. We have seen numbers like that during the current expansion: 2.59 in 2012, 2.53 in 2015, and 3.1 million so far in 2016. However, current demographic trends make consistent and sustained employment growth of that magnitude over the next decade challenging. The last of the baby boomers will reach retirement age over the next 10 years, and we’ll continue to see more and more of them leave the labor force.
Because of the baby boomers, growth in the working age population grew an average 1.8% per year in the 1960s and 1970s; since 1980, it has averaged just 1.2%. In order to increase the labor force substantially, that leaves a few scenarios: lure in people of working age who have pulled out of the labor force for various reasons, encourage people to retire later, or increase immigration. The last option is historically how the U.S. has avoided the aging problem facing many other developed countries, but Mr. Trump’s strong stance on immigration presents a hurdle.
FactSet clients: launch this chart
One month before the election, Mr. Trump announced via Twitter that the “shackles have been taken off,” referring to his already loose ties to the Republican establishment. Once in Washington, he will find himself with relatively slim Republican majorities in both chambers of Congress (51-48 in the Senate, with one race still pending, and 239-193 in the House of Representatives). Following this year’s unprecedented election rhetoric, the question will be whether the Republican houses will unite behind the new president to enact his proposed agenda as more specifics are unveiled.