It’s the economy, stupid. So said James Carville when he was advising Bill Clinton in his 1992 presidential campaign and the phrase is as true now as it was 32 years ago. Donald Trump defeated Kamala Harris this week for the same reason he lost to Joe Biden in 2020: millions of Americans were unhappy about the economic record of the incumbent party. Two out of three voters this week thought the US economy was on the wrong track – and that spelled trouble for Harris.
The question is whether they will feel any differently at the end of Trump’s second term in the White House, when it ends in 2029. Looking at some of the policies proposed by the president-elect, it is by no means certain that they will.
Trump is not a man to undersell himself and while campaigning said he had created during his first term the “greatest economy in the history of our country”. While clearly hyperbole, Trump’s record in the first three years of his presidency was impressive. The US economy grew strongly, inflation averaged about 2%, 6.7m jobs were created and the unemployment rate fell to 3.5%. Then, in the fourth year of his presidency the economy was hit by the Covid 19 pandemic. Lockdowns meant 20 million Americans lost their jobs and the unemployment rate shot up to 15%. A deep recession in 2020 pulled down the average growth rate to 2.3% across Trump’s first term.
So what is Trump proposing for the economy when he replaces Biden in January?
1. Lower taxes
Trump loves cutting taxes, and reductions for business and individuals are priorities for his second term. While plans are sketchy he has promised to cut corporation tax for companies that make their products in the US, from 21% to 15%. This is part of the president-elect’s “America first” agenda, with one of the world’s most competitive tax regimes designed to prevent US companies outsourcing production overseas and to persuade foreign manufacturers to move to the US. He wants to make permanent the income tax cuts made in 2017 but which are due to expire next year. With the US on course to run a 7% of GDP budget deficit this year, critics have said tax cuts worth up to $7.5tn over the next 10 years are unaffordable, given that the US national debt is already 122% of GDP. Trump says he has a way of paying for them.
2. Tariffs
Trump says he will pay for the tax cuts by imposing tariffs on foreign goods entering the US and has floated the idea of a 60% to 100% levy on Chinese products and a 10%-20% levy on goods from the rest of the world. The Tax Foundation, a US thinktank, has estimated a 10% universal tariff would raise $2tn over 10 years, while a 20% tariff would raise $3.3tn – well short of what would be needed to fully offset the revenue losses of making the 2017 tax cuts permanent. The impact of the tariffs will be to raise prices in the shops and reduce the spending power of US consumers. Some estimates suggest the losses for the average US household could be between $2,500 and $3,900. Those who voted for Trump on the basis that he will deliver lower inflation and faster growth in living standards could be in for a shock.
3. Drilling and the environment
The centrepiece of Joe Biden’s industrial strategy was the Inflation Reduction Act, which was designed to stimulate green growth through a system of tax incentives and subsidies. Trump has criticised the act for being too expensive, and plans to ban offshore wind projects and give the go-ahead for the resumption of large-scale oil and gas drilling. While analysts expect longstanding tax credits for onshore wind to remain in place, America under Trump is not going to be in the vanguard of the fight to achieve net zero. Trump has summed up his energy policy in three words: “Drill, baby, drill.”
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4. Interest rates, the dollar and the Federal Reserve
The US economy is operating at close to capacity and unemployment is low. Tax cuts will increase demand, while higher tariffs will push up prices. Higher inflation will be the result and that will mean America’s central bank, the Federal Reserve, will be more cautious about cutting interest rates. If US borrowing costs stay higher for longer, the US dollar will rise on the currency markets, offsetting some of the impact of tariffs by making imports cheaper. If his first term is any guide, Trump will put pressure on the Fed to cut rates. The US central bank reduced US borrowing costs by 0.25 points on Thursday but its chair, Jerome Powell, clearly expects trouble. Asked if he would step down if Trump asked him to go, and if he could be legally ordered to do so, Powell replied “no” and “not permitted under the law”.
5. Migration and deregulation
Trump says he will begin immediately the deportation of the estimated 11 million people living in the US without legal status, although he has given few details of how they would identify the individuals involved. He also plans to complete the project launched in his first term: the building of a wall along the border between the US and Mexico. If successful, these policies would reduce the supply of low-cost labour and push up business costs. Trump favours business deregulation, including dismantling the safeguards put in for artificial intelligence, ending the “persecution” of the crypto industry, and making Elon Musk the head of a government efficiency commission with the task of cutting “red tape”.
6. What does it all add up to?
Trump only has four years as president so will be in a hurry to move forward with his tax cuts, import tariffs, energy policy and deregulation. But the chances are that lower taxes will have a sugar rush effect, with their impact fading as dearer imports and higher interest rates slow the economy. The risks of it going wrong are high.
