After one year, there is no doubt President Trump is leading a revolution in the United States. It is a complex revolution whose objectives I divide into three groups.
Group 1: To reduce the rights of minorities; to enrich the wealthy at the expense of the poor; to reduce the benefits of social security and medical care for the lower 80% of the income distribution; to pull down the boundary between religious organizations and the state; to reduce environmental protection and promote use of fossil fuels ignoring the threat to the planet of global warming, to reduce immigration to the US; to suppress freedom of the press; and to increase the military power of the US.
Group 2: Objectives of this revolution are largely linked to trade policy: To increase investment in the US; to reduce trade between the US and other countries; to create more jobs in manufacturing; to allow banks to take on greater risks; to promote less competitive industrial organizations; and to weaken the economic viability of agriculture.
Finally, Group 3: To reduce the quality of education in the US; and to surrender America’s leadership in the science and technology.
Leaders must be judged by what they do, not by what they say. The above list of objectives may startle the reader but this is what the first year of the Trump presidency reveals. This article deals with the most important Trump legislation, the changes in the tax system. The new tax law just passed by the US congress is the first major legislative action of the Trump administration.
1. The act seriously disturbs the stability of the American economy: This legislation is an action of ignorance, not of purpose, and it will have a strong negative impact on the economy over the next decade. The American economy is growing smoothly, and is at full employment.
When an industrial economy is operating at full employment the revenue system should be sufficient not only to cover government expenditures but also to produce a surplus. This surplus enables the government to run a deficit when there is a recession. The American Congress should be raising taxes, not reducing them. The failure to construct a revenue system that runs a surplus during periods of full employment is one of the great failures of macro-management of the American economy.
In 2000, the government was running a surplus, largely due to the courageous behaviour of HW Bush in raising taxes in 1990 and subsequently Clinton’s sensible fiscal policies. But George Bush proceeded to reduce taxes when the economy was strong; when the major financial crisis of 2007-2008 struck, it caused large deficits incurred as the government acted to lift the economy out of the recession.
Everything in macroeconomics is very difficult, but the basic idea that the government budget should be in balance over the business cycle is a widely accepted principle.
President Trump and the Republican Congress ignored this principle, laying the groundwork for a massive increase in government debt when the next recession occurs, which it will in the next two-three years. With the government finances in deficit through the business cycle, there will follow a major increase in US government debt, destabilizing the economy over the next five years.
2. The new tax law will make the income distribution more unequal: The richer will benefit much more than poorer people. By making large reductions in taxes on earnings of capital, it increases the after-tax return to capital, but makes only temporary and limited reductions in taxation of labour. Since the wealthy own most of the capital, the net result is the income distribution will become more unequal.
This legislation is an action of ignorance, not of purpose
3. All agree the changes brought about by the new tax law will increase the government deficit and hence government debt. The Republican response is to demand action to reduce expenditures made necessary by the increased debt arising from the tax cuts.
The Republican view is the so-called entitlements must be reduced. This targets social security, assistance to people with serious disadvantages, and the government’s role in providing medical care to old people and poor people.
Thus, the new tax law, by reducing tax collections, opens the door for reductions in key services to the poorer 80% of the population. This is a cruel and cynical approach to government policy. And, the Republicans are quite open about their objective.
4. Serious scholars of the US defense posture are agreed that substantial increases in defense expenditures are needed. Rehabilitation of the nuclear deterrent, expansion of the navy to meet the rising challenge from China, increasing the state of readiness, increasing the strength and speed of response to Russian incursions in the Baltic states or the Ukraine, increasing the strength and speed of a Chinese attempt to seize Taiwan or limit traffic through the South China Sea, and increasing the effort devoted to cyberwarfare.
Failure to prepare and raise readiness may result in challenges that the US can meet only by a larger war made necessary by a slow initial response. Will the American people agree to a major war over Lithuania or Taiwan?
There is a real need to increase defense expenditures to avoid the possibility of a small war escalating, as the US cannot initially contain it. The tax reductions make it more difficult to make the necessary increases in defense expenditures.
5. The new tax law removes the mandatory requirement that one must purchase medical insurance. It thus starts the destruction of Obamacare which was meant to provide medical insurance for everyone.
Ironically, this idea of managing medical insurance by mandatory participation was worked out by the Heritage Foundation, the think tank for right-wing Republicans. This removal of mandatory participation is likely to be the effective end of Obamacare.
6. The tax law allows more drilling for oil and gas in Alaska opening large potential cheap oil supply. This flies in the face of the world’s efforts to reduce the use of fossil fuel as a mandatory action to reduce global warming. Dropping out of the Paris Accord was paper work, drilling in the Arctic is real.
7. Initial drafts of the tax law would have allowed religious organizations to participate in politics using their voice and their resources to support issues and candidates.
This undermines a fundamental position of American democracy that the church and the state are separate. While this clause was dropped from the final tax law, it will come back.
There it is. The Trump tax law is poor economics, potentially undermines key social safety net programs, makes the income distribution more uneven, promotes the use of fossil fuels, and almost opened the door to religious organizations engaging in politics.
How could the United States go so wrong? There seem to be many factors at work.
Sadly, what seems to be the dominate factor is a gaggle of extremely wealthy men who are using their wealth in a coordinated manner, effectively bribing the politicians to take the actions that will protect and expand the wealth and power of the extremely wealthy.
Forrest Cookson is an American economist.