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Don’t Write off Trump’s Ambitions for Economic Growth

Ryan Bourne

When President Donald Trump declared in September his ambition
of sustained US economic growth of between 3pc and 4pc per year,
economists baulked.

A survey from the National Association for Business Economics
found an overwhelming majority thought growth would slow by the end
of this year, with significant headwinds thereafter from the
effects of an ageing population. The Congressional Budget Office
thought potential US GDP growth would slow to just 1.9pc per
year.

The risks of trade wars started by renegotiating the North
Atlantic Free Trade Agreement and abandoning the Trans-Pacific
Partnership, the potential for actual conflict with North Korea,
and proposed clampdowns on immigration, would surely bring
uncertainty that would dampen investment.

Well, the forecasters have been wrong, for now at least. Though
the larger structural challenges remain, last week’s GDP numbers
show the US growing at 3pc for the second quarter in a row.
Business investment on new equipment increased at an 8.6pc
annualised rate. The US unemployment rate has fallen to 4.2pc. All
this before the Republicans have even delivered on their tax cut
and reform package, which they are hopeful will slash the US
federal corporate income tax rate from 35pc to 20pc, and lower
marginal income tax rates too.

Sure, economic risks still exist. Only a fool would forecast
sustained uninterrupted growth. But one shouldn’t write-off the
Donald’s chances of delivering the robust economic performance he
promised.

After working its way through Congress the final tax package
could change substantially. Free-market critics are right that it
seems a missed opportunity for broader, more substantial
reform.

Nevertheless, should it be delivered, the economists Laurence
Kotlikoff, Seth Benzell and Guillermo Lagarda estimate it alone
could add between 3pc and 5pc to the level of GDP in the long-term.
This would translate into wage rises of between 4pc and 7pc.

Critics of course will claim that Trump cannot take credit for
this recent uptick in economic performance, because he has not
fundamentally altered economic policy.

Though big on rhetoric in his campaign, there has no been no
major infrastructure push. Republican attempts to overturn
Obamacare and its taxes and mandates failed. Even tax reform hasn’t
happened yet. But business leaders do appear to truly believe that
economic growth prospects have improved under the new president,
and when looking at the administration’s paradigm shift on
regulation compared with the Obama era, it’s easy to see why.

All the time the media is focused on the Russia investigation
and what Trump is tweeting, the US executive and Congress are
slowly undertaking the biggest assault on the regulatory state
since Ronald Reagan, if not before him. There have been some major
public actions, of course — pulling out of the Paris climate
agreement was a big signal the Trump administration would
prioritise growth. Just last week Congress repealed a host of
regulations in relation to banks. The real revolution, however, is
coming through a combination of inaction, repeal and the setting of
frameworks for new regulation that could substantially curb the
regulatory state.

Back in August the American Action Forum compared Donald Trump’s
regulatory performance in his first 200 days as president to Barack
Obama’s. Trump, they concluded, had “imposed: 1/20th of the
lifetime costs, 1/11th of the annual costs, and 1/8th of the
paperwork” through new regulations.

This week, the US Chamber of Commerce has tallied up Trump’s
deregulatory actions, estimating that 29 executive orders straight
from the president’s desk and 100 additional directives from
government agencies have shrunk or eliminated regulatory
requirements.

That’s before the efforts from the Republican-controlled
Congress. They have been using the Congressional Review Act, a
vehicle to repeal recent regulations and rules announced by
regulatory agencies, to vote their disapproval on rules which came
in at the end of the Obama presidency. Trump has subsequently
repealed 14 regulations, with another pending. In fact, some
Republicans are even examining the prospect of using a loophole in
the Act to review old regulations and guidance from years before
for which no report was submitted to Congress.

For new regulations, Trump has implemented a “one-in,
two-out” rule akin to something the government in the UK has
done. The administration is also keen to introduce more stringent
regulatory budgets. Even in areas where legislative activity has
floundered, such as healthcare, Trump’s recent executive order
gives guidance that could relax regulations to allow people to be
able to obtain renewable short-term insurance for far lower
premiums than under Obamacare.

Individually, some of these actions are small fry. Others are
more substantial. But the direction of travel is clear. Under
Trump, there is an executive that believes in the power of
supply-side economics, that wants to lower marginal tax rates on
work and investment, and that wants a permissive, light-touch
regulatory state.

To be sure, huge economic challenges remain. The US long-term
fiscal outlook is still dreadful, almost entirely due to unreformed
entitlement programmes in the face of an ageing population.

A break up of NAFTA negotiations really could lead to lots of
short-term disruption. As with all economies on the technological
frontier, the US economy in the coming decades could be transformed
by artificial intelligence and new technologies with significant
social consequences.

Yet political discourse is far less fatalistic in the US than in
the UK about the ability for policy to improve matters. Trump is
going to pull the levers of lower taxes and less regulation to try
to pull the US economy back to higher growth in the coming years.
And you’d be foolish to write him or America off.

Ryan Bourne
holds the R Evan Scharf Chair for the Public Understanding of
Economics at the Cato Institute.