THE PROSPECTS OF TRUMPS’ SUPPLY SIDE ECONOMIC POLICIES GIVEN EXISTING ECONOMIC CONDITIONS
The success of any economic plan that professes correcting the errors and economic damage created by an existing faulty plan must take into consideration the existing economic environment in its entirety in which it will function. Even though this article can be read as a stand-alone piece for most readers, there are some aspects of the discussion that will have more clarity if two other short papers posted in www.georgeecoinomics.com are read first, Classical Economic Theory, Monetarists, Keynesians and Politicians and Macroeconomics – MONEY – SPENDING – INFLATION. These two papers, written in 2022, explain how the intersection of basic economic realities and the distortions attributable to political agendas created the economic environment that the next Trump Administration will be addressing starting on January 20, 2025. Keep in mind that the primary economic reality that underpins the logic of relevant economic analysis is that the free market is the critical engine that drives the economy in a manner that efficiently serves both consumers and producers (i.e., that seeks to maximize total social welfare).
The most damaging trend in the American economy since the turn of the century has been the expansion of government regulation and fiscal spending far beyond that required for the government to be an effective referee of the marketplace and to be able to operate rational social and disaster safety net programs. The last time the federal government blessed the country with a balanced budget was in 2001. In fiscal year 2024 (ending September 30) the federal government ran an unsustainable deficit of $1.8 Trillion. The level of federal debt has increased from approximately $5.81 trillion to the mind-numbing level of $36.22 trillion as of November 26, 2024. In the last sixteen years, the Democrat party has held the presidency twelve years, and the Republican party has held the presidency four years. The Obama Administration, starting in January 2009 (following the Republican presidency of George W Bush), initiated a hard turn to the political left that radically increased the government’s role as a player and chooser of winners and losers in the marketplace. The level of productivity in the overall economy began to stagnate as government spending became an increasingly greater percentage of GNP. Up to that point the Marxist ideologues, which dominate the Democrat party, had been content to chip away at the free market through slow but steady increases in the bureaucratic regulatory tentacles of government and slow but steady increases in the portion of GNP attributable to government activity.
Keynesian theory of controlling the economy strictly with demand side policies has dominated the economic agendas of the Democrat Party. Far left ideologues made this choice because it facilitated cover, through their stretched interpretation of the Keynesian concept of government intervention during down turns, for always increasing the role of government in the overall economy. The Federal Reserve, with its Keynesian toolbox of target interest rate adjustments to influence investment and consumption, and bond sales and purchases to remove or inject money directly into the economy, has been scrambling more than ever to support the Democrat Party’s economically destructive burgeoning bureaucratic march to the left over the last four years of the Biden Administration, following in the footsteps of the Obama Administration. The Obama Administration laid the groundwork for the hard left movement of the Democrat Party and Biden finished off the fiscal stupidity that led to the highest inflation in decades. Obama’s push for big government effectively set the stage for the Supply Side success of the first Trump Administration. By the end of the eight years of the Obama Administration, slow economic growth became the “New Normal.” With the economy in the doldrums, inflation was tame because demand was muted while supply stimulus and effective growth incentives were nonexistent, given the Democrat Party’s far left agenda driven fiscal adventures (such as Solyndra and the “shovel ready” projects that went nowhere).
The Trump Administration’s 2017 Tax Cuts and Jobs Act and overall supply side friendly fiscal policies changed the GDP growth trajectory from slow to accelerating without creating notable inflation. At that time, I had warned that timely cuts in government spending and regulation should play a role in controlling inflation and the deficit. The tax cuts were across the board driving both supply and demand. The improved financial health of the consumer was significantly better than projected by the left-leaning Keynesian pundits with low-income wage earners enjoying the highest real take home pay in over forty years. Not only did inflation remain under control, tax revenue actually increased due to the acceleration in free market business activity (contrary to the clarion of alarm bells sounded by far-left gurus such as Paul Krugman and Mark Zandy who could not escape the biased projections generated by their static, thumb on the scale, Keynesian macro models that have been consistently wrong regarding the outcome of supply side policies). This was an unequivocal confirmation of the “Laffer Curve,” including in this case where the economy is in a flat growth phase with relatively high taxes. Note that the Laffer Curve postulates an optimal tax rate, above which government revenues decrease.
The dire predictions made by the same gurus regarding the inflation that was supposed to follow the tariff’s Trump imposed or threatened to impose (to force negotiation) also never materialized. The inability of their static macroeconomic models to dynamically score the increase in tax revenue created by the increase in private sector activity only partially accounts for their errant projections. The anemic growth of the economy leading up to the Trump presidency fed into the success of the supply side growth policies as the financial health of producers and consumers benefitted from the re-acceleration of the free market (which until then lacked supply side stimulus) and the rebalancing of supply and demand at higher levels without the turmoil of inflation. Despite all the political chaos that plagued the Trump Administration, it took a national pandemic (Covid 19) and the unnecessary shutdown of the economy to interrupt the acceleration of GDP growth and create a discontinuity in the growth path.
The blatant mishandling of the Covid 19 shutdown of the American economy during 2020 led to an inevitable economic downturn, but with the tax cuts and basic growth-related policies in place, a “V” shaped recovery was anticipated when the economy reopened. The presidential election in 2020 ushered in energy crushing, regulatory, and agenda spending policies that created the worst inflation in over forty years. Biden’s first agenda driven move was to put regulatory handcuffs on American oil and gas producers which caused the price of oil to skyrocket both domestically and globally. Bloated government agencies under the aegis of the Biden Administration helped upend the favorable direction of the economy as Biden’s handlers unleashed four years of far-left bureaucratic regulation that seriously squeezed the business sector, especially small businesses. In addition, the Federal Reserve, which was late to react to obvious inflationary pressure, which they myopically viewed as transitory, had to raise the target interest rate sharply which rendered capex financing impossible for then small business sector. Equal to their domestic stupidity was the Biden Administration’s lack of foreign affairs wisdom related to energy and Iran sanctions which allowed Russian and Iran to fill the war chests with oil dollars, resulting in the wars in Ukraine and the Midde East. Bad things happen when bad players have lots of money.
The Trump landslide victory in the 2024 presidential election has signaled a return to growth-oriented supply side economic policies and a renewed push for energy dominance. Unlike the first Trump Administration, the economic landscape that the second Trump Administration will face will not be benign 2017 environment, exhibiting slow growth and tame inflation. Government agencies and the overall regulatory apparatus will still be severely bloated (even more than what existed in 2016). Inflation will now be an issue and the Federal Reserve’s target federal funds rate will be close to 4.5%, in comparison to 0.5% in 2016, as the Federal Reserve continues to battle Biden’s agenda driven record inflation. It is apparent that inflation is likely to be quite a bit stickier than the Federal Reserve has projected, as they now recognize that the “soft landing” will stretch out longer than professed prior to the 2024 election (i.e., elongated soft landing). The tax cuts established by the ‘Tax Cut and Jobs Act’ of 2017 will still be in place, which has kept the economy ‘above water’, and there will be millions of additional illegal migrants that Biden let in the country without any background checks to deal with. Oil production, though at record levels, is millions of barrels per day short of potential levels (i.e., without Biden Administration directed regulatory strangulation).
Chairman of the Fed, Jerome Powel, referred to the economy in 2019 as being in a ‘goldilocks’ type sweet spot, with robust growth and tame inflation. Coming out of the poorly handled pandemic lockdown the economy was expected to experience a robust ‘V’ shaped recovery. Biden’s far left handlers, in a fit of agenda driven spending and regulatory euphoria over the past four years, have made an excretory mess of the economy. In so many ways, the task of straightening out the economy being undertaken by the incoming Trump Administration is far more complex and treacherous this round (in 2025) than in 2017. Given the excess demand that Biden’s agenda driven policies have created, and the Federal Reserve’s toolbox being limited to Keynesian demand side restrictive actions, the best supply/demand rebalancing plan should incorporate supply side policies as a major driver. Given the present inflationary risk caused, in part, by the amount of money that the Biden Administration has already pumped into the economy and its push to spend billions more by the end of its lame duck session, there is ample reason to question any prognosis of the Fed’s 2.0% inflation target being attained any time in 2025.
The Trump overall economic plan tracks all the positions I have taken for decades. Primarily, I have always pushed energy dominance and an untethered free market environment where the American entrepreneur can spin his or her magic, free of overbearing regulation. The government should be restricted to being a referee and not a player. The Trump Administration, figuratively, must be able to ‘chew gum, scratch its nose, do somersaults, and a myriad of other tasks’ at the same time to replicate and expand on the economic success of its first term. If the Trump Administration can pass another round of consumer and producer friendly tax legislation and relieve gas and oil production of their regulatory shackles almost immediately and start an aggressive push to reduce government spending and the bureaucratic Washington DC quagmire, the probability of economic success will be favorable. Timely execution is of the essence because inflation going into 2025 is not benign and the existing consumer friendly tax structure of the 2017 Tax Cut and Jobs Act expires at the end of 2025. All the noise from left leaning Keynesian gurus regarding tariffs is just noise until they occur or until they do occur and are exorbitantly high. As noted earlier, the tariffs that Trump imposed during his first term were targeted and not inflationary. Also, it is more likely than not that the 25% tariffs threatened related to the northern and southern American border will result in cooperation from Mexico and Canada rather than tariffs. Keep in mind that when Trump states that he will expand the use of tariffs, he does have the negotiating tactic of ‘threatening a punch in the nose’ before the talking starts. Theoretically, I am not in favor of generic tariffs, but his approach to tariffs was not troublesome the first time around. Curiously, with all the bellowing about the downside of actual targeted tariffs when Trump proposes them, there was a notable silence while these tariffs remained in place during the Biden Administration. Was a positive net benefit selectively recognized according to political expediency?
The economic scorecard of the upcoming Trump presidency will be favorable if his policies create robust growth, radically reduced government spending, bloated bureaucracy and free market killing regulation without creating excessive inflation. The non-governmental Department of Government Efficiency headed by Elon Musk and Vivek Ramaswamy has been set up to aggressively work with congress to address these efficiency concerns. At the heart of this effort, however, is a more balanced supply side policy that addresses the existing unbalanced supply/demand relationship by pushing supply more than before but not ignoring demand in the tax structure and the regulatory environment (in contrast to the Keynesian model which pushes only from the demand side). This should minimize the role of the Keynesian driven Federal Reserve which can only fight inflation with target interest rate adjustments which have been severe (and economically disruptive) during the Biden Administration. Note that the PMI (producing managers’ index) has decreased 24 times in the past 24 months attributable to Federal Reserve tightening. Instead of the federal government wasting trillions of dollars on agenda driven spending isn’t it better to return such decision making to the consumer and the free market, who will do so far more efficiently. The target is to improve on the 2019 ‘goldilocks’ type growth without inflation, referenced above, and keep the Fed’s target rate activity muted. Trump appears to have most of his plans to address the issues discussed above allocated to specific individuals or groups with specific expertise to address them aggressively in a timely manner. The key to success will be in the execution of the promises and projections he has made (i.e., fiscal, bureaucratic, regulatory, social and security). If successful, the winners will be the American people, with the government no longer picking winners and losers, with free market efficiency unleashed and with America unburdened from the wasteful spending and bureaucratic bloat foisted on the taxpayers by left-wing ideologues. The score card will be filled out by the voting public in the midterm elections. The plan has a lot of merit, and the scorecard will reflect level of execution and how well the hopes and wellbeing of the voters are being fulfilled