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The Business Edge
The Business Edge
Todd Federman - Decoding President-elect Trump's Economic Policies: Impacts on GDP, Employment, and National Debt
In this episode Feliciano School of Business economics professor, Todd Federman, offers a compelling analysis of President-elect Donald Trump’s proposed economic policies. Todd demystifies the intricate connections between mass deportation of undocumented workers, sweeping tariffs, and the decision to maintain current income tax rates until 2026. By dissecting these proposals, Federman provides a glimpse into how they might affect the GDP—a critical measure of the nation's wealth—and explore their potential ripple effects on employment and income distribution across America.
As we navigate through the complexities of federal budget dynamics, Todd sheds light on the implications of the projected $2 trillion deficit for 2024 and the mounting national debt, which now exceeds the annual GDP. This episode provides listeners with anunderstanding of how these economic elements interplay, influencing tax revenues, government spending, and ultimately, the nation's fiscal health.
My name is Todd Fetterman. I teach economics here at the Feliciano School of Business at Montclair State University. Well, the election's over. Today I'll be discussing three key economic policies that Donald Trump, the president-elect, has been promoting, to try to understand what impact these policies will have on the economy. Those three important policies he's been talking about are number one, the mass deportation of undocumented workers. Number two, across the board tariffs. And number three, continuing the current income tax rates, which are set to automatically increase by law on January 1st 2026.
Speaker 1:Before we begin the discussion of the impact of what these proposed policies will have on the economy, we need to discuss two important concepts. First, what do we mean by the economy? When economists and politicians refer to the economy, they're referring to something called the GDP, the gross domestic product. Gdp is the total value of final goods and services made in the United States. All the new houses built, the new cars sold food, gasoline, going to restaurants, services, getting your teeth cleaned at the dentist, houses built, the new cars sold food, gasoline, going to restaurants, services, getting your teeth cleaned at the dentist, going to the accountant. It's a measure of how wealthy the country is, how much stuff we have when we divide GDP, that gross domestic product by the population, we get the amount of stuff per person. Gdp is also the measure of the total income of the country. How is it that the value of all the goods and services is equal to the income of the country?
Speaker 1:Let's take as an example a $35,000 car. Half of that money a little more than half goes to pay wages, which is income for the workers. Some of the money goes to pay interest on debt that the car company used. They borrowed the money to build the plant. That money is income to people who lent the money to the automobile company and, in addition, whatever's left over is the profits, that's, the income to the car company owners. So GDP is both the value of the goods and services and it's the income of the country. And, in addition, every level of GDP corresponds with a level of employment. More GDP means more jobs. So when we're thinking about policy, we want to understand the impact on GDP, both the measure of all goods and services and also the measure of the income of the country, which will then correspond with the level of employment. For 2024, the gross domestic product of the United States is going to be approximately $29 trillion. Divide that by a population of 337 million people, and that's approximately $86,000 per capita or per person. Now that's not evenly distributed. Taylor Swift has a whole lot more. Over the last four years, us GDP growth every year has been between 2 and 4 percent, far ahead of the rest of the developed world. So when considering economic policy, we want to anticipate what's going to be the impact to GDP.
Speaker 1:The second important concept we need to consider is the federal budget and how policy will affect it. The federal government collects most of its tax revenue from households in the form of one, income taxes and two Social Security, payroll taxes and, to a lesser extent, business taxes. Where does that money go? The federal government spends the money on two broad types of expenses Mandatory expenses those required by law, and discretionary expenses items that are set annually by the federal budget. The main mandatory expenses are Medicare, social Security and interest on the debt. This is more than 60% of federal government spending. The second type of expenses which are set annually by Congress are the discretionary expenses items, like money for the FDA, the FBI, the CIA, the NSA, the military, congressional staff all the other stuff that makes Washington run. So when thinking about policy, we need to consider the impact on taxes that will be collected and the impact on federal spending.
Speaker 1:When we and by that I mean the federal government spends more than we take in in taxes, we run a deficit. The government funds this deficit by borrowing the shortfall and that adds to the national debt. For 2024, the federal government will take in approximately $5 trillion in taxes and spend approximately $7 trillion. That's a $2 trillion deficit, which means we're adding $2 trillion to the national debt this year. Right now, the national debt is estimated to be approximately $36 trillion. That's even more than the annual GDP gross domestic product of $29 trillion. For historical perspective, the last time national debt was greater than GDP was at the end of World War II, when we had issued a lot of debt to pay for the war.
Speaker 1:Before any economic policies by Trump are enacted, most estimates are for the annual deficit for the foreseeable future to be in excess of $2 trillion a year Means we're already planning on adding $2 trillion in national debt every year for the next decade. So, to recap, when we consider economic policy, we want to consider the impact on GDP, the income of the country and the impact on the federal budget and the national debt. Do we expect the policy to increase GDP or decrease it. An increase means more goods, more income, more employment. A decrease means less goods, less income, less employment. And how will it impact the budget? Will it increase the deficit and require even more borrowing? That was a long introduction, but now that brings us to policy.
Speaker 1:The number one policy, repeated by President-elect Trump like a drumbeat, is to deport immigrants that do not have proper documentation, a visa or a green card. Estimates of the goal run anywhere from 2 to 10 million people. A recent paper by the Brookings Institution estimated that deporting 750,000 workers would cut GDP by approximately half a percent. If the deportations are larger, the impact would be more severe. Deporting 1.5 million workers will probably reduce the GDP by 1%. Then there's a multiplier effect. All of that GDP reduced means there's going to be less people spending money at Walmart, less people spending money at McDonald's and we're going to see a fall off in business across all different sectors of the economy. Also, many, but not all, of these undocumented people are paid on the books, which means they're currently paying into Social Security. So this will reduce federal tax revenue, but this will be very difficult to measure. But it will reduce revenue and therefore increase the deficit and the debt needed to cover that deficit. The effect on certain industries would be catastrophic. Agriculture, construction and hospitality, restaurants and hotels all employ large numbers of undocumented workers. A mass deportation would be a major disruption, causing all kinds of shortages, and when a good or a service is in short supply, the price invariably goes up. It's inflationary. Finally, a mass deportation will be expensive. The billions needed to do this will most likely be borrowed, adding to the national debt.
Speaker 1:The next big economic policy promoted by President-elect Trump is tariffs. A tariff is a fee or a tax charged by a government to bring goods into the country. The company that imports the goods must pay the cost of the tariff. When the goods are allowed to enter the country, then they often pass along this tax by raising prices. The president is allowed to do this. He's allowed to impose tariffs because in 1934, congress passed a law that allows a president to place tariffs on goods without additional approval by Congress. Previously, when Trump was president, he placed tariffs on some goods coming in from China, primarily steel.
Speaker 1:A tariff like this on a product that we make in this country has the effect of making the imported goods more expensive relative to a product manufactured in make in this country has the effect of making the imported goods more expensive relative to a product manufactured in the US. Therefore, it will make American products more competitive. But a tariff like this has negative impacts. By placing a tax on steel, everything made with steel is more expensive. The additional money spent on products containing steel takes away from other spending, costing jobs that will be lost from those products. But what about products that we don't make here? Less than 5% of the clothing sold in the United States is made in the country. The overwhelming majority of consumer electronics, phones and computers are imported.
Speaker 1:An across-the-board tariff on items like these isn't going to promote domestic production. It's simply going to raise the prices and cause more inflation. There is almost universal agreement by economists of all stripes, liberals to conservatives, that an across-the-board tariff on all goods would be inflationary and cost jobs. In response to the previous Trump tariffs, china retaliated by putting a 25% tariff on $100 billion worth of US agricultural products like soybeans and other crops. This caused American farmers to lose a lot of business to China as China stepped up buying from South America.
Speaker 1:For those of you who want to do a deeper dive into the negative impacts of tariffs, especially an across-the-board tariff. Look up Smoot-Hawley that's S-M-O-O-T. Smoot-hawley Tariff Act of 1930. It was implemented by Congress in reaction to the Depression, thinking they would make foreign goods more expensive. Almost everyone agrees it just simply made the Depression deeper because it made everything more expensive. This year, we will import almost $4 trillion of foreign goods, from electronics to clothing to steel. Increasing the cost of $4 trillion in goods will likely mean the level of imported goods would drop and we would be making some of these products here in. Goods will likely mean the level of imported goods would drop and we would be making some of these products here in the United States and they'd be more competitive. Taxfoundationorg estimates that a 20% across-the-board tariff would raise taxes by over $500 billion annually, putting upward pressure on prices and shrinking GDP as a result by up to eight-tenths of one percent.
Speaker 1:The last main economic policy touted by Trump is tax policy. In 2017, congress passed the Tax Cut and Jobs Act. It reduced tax rates for companies and individuals across the board. These lower tax rates are set to expire on December 31st 2025. Trump has said that a main priority is to make these tax cuts permanent. Current budget forecasts assume that these tax rates will be going back up and bringing in more revenue to the government by making the tax cuts permanent. Economists at the Wharton School estimate that the deficit will grow by an additional $400 billion annually, or $4 trillion over the next decade, requiring even more borrowing by the federal government.
Speaker 1:If the rates are made permanent, then consumer spending and savings will be higher than if the tax cuts expire. So keeping the rates where they are will be a boost to anticipated consumer spending. However, the increase in consumption will probably only have a modest positive impact on GDP because most of the taxes paid come from the top 20% and they're the least likely to increase spending when they get more money. Keeping the tax cuts permanent will also most likely cause a slight increase in inflation from the additional consumer spending when people have more money. So to recap the three main important policies mass deportations will have a negative effect on GDP while simultaneously putting upward pressure on prices coming from the shortage of goods. Taxes paid by undocumented workers will be lost and the operation will cost a lot of money, money that will probably be borrowed, adding to the national debt. Tariffs will have a strong upward push on inflation, while also having a negative effect on GDP as spending is taken away from some goods to pay for the tariff, costing jobs. In addition, retaliation by foreign governments would cut exports for many US-made goods, costing even more jobs.
Speaker 1:Tax cuts. Making the tax cuts permanent will increase the deficit, causing more borrowing and putting upward pressure on interest rates. It looks as if most of the policies Trump has proposed will be inflationary, hurt GDP and employment and tack on additional trillions in debt. Stay tuned. I hope you enjoyed this discussion. If you have any questions or comments or suggestions, please email me at Federmanantea at montclairedu. I'd love to get some feedback and responses and some ideas for future podcasts. See you in the next podcast.