After being taken for granted by the Democratic Party since Bill Clinton’s election in 1992, white, working people gave the Electoral College victory to Donald Trump by delivering Rust Belt states to him. As an economist, I ask what he and his party may do for them in return?
The easiest policy will be to invest heavily in our eroding infrastructure. Both Trump and Clinton advocated new federal spending in this area. Their difference was that Trump said the funds would come from private investors while Clinton intended to fund the projects from higher tax rates on the highest income earners.
While toll roads are becoming more popular in some states, it is difficult to see how investors could secure profits from infrastructure investments in schools, hospitals and transportation.
During his presidency, Obama continually sought infrastructure funding from the Republican-controlled Congress.
Contrary to their previous policy of funding these projects through bond financing, Republicans suddenly required that every dollar spent come from spending cuts in other programs. It will be interesting to see if their approach changes during the Trump presidency.
The second approach may be new trade agreements. While I agree that NAFTA was harmful and the proposed Trans Pacific Partnership is ill advised as written, the problem is that most of the jobs which left the country are not going to return. We cannot compete on wages for unskilled or semi-skilled workers against countries where people can live on a dollar or so an hour. The horse is out of the barn!
Workers who lost their high-paying jobs sadly are not prepared to assume the new positions which American firms need to fill. The changing global economy cannot be reversed; instead we must prepare our labor force for new, higher value-added opportunities technology has created. This will require a new federal commitment to labor education and training. Will congressional Republicans support this?
Thirdly, the new president may relax our environmental regulations pertaining to carbon-based energy sources. He talked about bringing coal back.
Here again we face changes which will be hard to reverse. Power companies around the country, including Georgia Power, have invested in new energy-generating facilities.
Natural gas is now the preferred energy source. Utilities tout their commitment to improving their impact on the environment. Demand for coal will grow slowly at best for Trump.
Because tax proposals are always changed through the legislative process, we do not know what the new tax laws will be. Initially, Trump proposed huge cuts on personal rates for the highest earners. We have learned that the economy gets a greater boost when more of a tax cut benefits the middle and working classes. They spend more of their new net incomes, and our firms experience new demand and hire more employees.
Corporate tax rates will also be cut. This is complex because most corporations use various tax code benefits to lower the actual rate paid significantly below the official 35 percent rate. Lower corporate tax rates will possibly encourage firms to invest more in new technologies which is good for the overall economy but only increases employment in capital good producers.
Employers hire additional workers only when they cannot satisfy their expected demand with their current employees.
Possibly the biggest tax issue is a new treatment for the repatriation earnings which American corporations have kept abroad to avoid paying taxes here. Estimates of American corporate profits earned abroad and not returned here to avoid full taxation reach $2 trillion. This amount is greatly overstated as much of this money has been held by American banks which bring it back to our shores anyway.
But the issue remains important for two reasons.
First, American firms have become expert at shifting revenue among subsidiaries in order to claim income where the rates are lowest and costs where the tax is higher. The loser has been the American Treasury.
Even if we keep federal spending constant, we could lower our personal income rates with no negative budgetary result by collecting taxes on the real income.
Second, some American corporations have purchased foreign firms in order to move their official headquarters, and therefore their reported income, to low tax countries such as Ireland. This is called tax inversion. If this trend continues, the Treasury will again lose revenue.
Bringing more capital home will be beneficial for the economy as the Federal Reserve Board is expected to raise interest rates by the end of this year. Higher interest rates without the influx of funds into the country will slow or reduce potential economic growth.
Trump’s primary proposals on immigration will not be approved. Domestic corporations use the H-1B visa program to employ foreigners when qualified citizens are not available. Ending this program would only hurt American firms.
Removing 11 million undocumented people, even if possible, would also damage the economy. Our Georgia farm owners left crops in their fields after an aggressive state program discouraged undocumented people from providing seasonal labor.
Imagine how long our storm repairs would take if somehow all undocumented people would disappear.
The president-elect’s approach to our military commitments abroad may, however, provide some budgetary space for either more tax cuts or innovative support for American companies. There is no economic justification for our military expenditures in Europe or Asia. Why do we have 27,000 troops in South Korea? How many bases do we have in Europe? Here we can applaud the revolt against the foreign policy establishment.
Two tools the Democratic Party has used to enhance the well-being of working people, legislative actions favoring collective bargaining and friendly appointments to the National Labor Relations Board, will never be approved by the Republican Congress.
Candidate Trump said that “taxes and wages are too high.” It will be interesting to watch what his administration does to satisfy the expectations of his party’s new constituency.
Kenneth Zapp, Ph.D, is professor emeritus at Metropolitan State University and mentor for SCORE Savannah.