Donald Trump is running for president of the United States. What started out as an unlikely scenario is becoming reality. He will become the republican nominee to run for president, meaning that he has a fair shot at becoming the US president. What will be the financial and economic impact if he became the US president? In this blog I will try to show a deeper understanding of the effect it will have on the US and world economy.
Trump has been saying a lot of things about many different topics. I’m not going to write about what he thinks of Mexicans, Muslims, women or anything else which is not directly related to the things he is planning to do to “improve” the economy.
One of the first things trump wants to do is cut taxes up to $10.49 trillion in 10 years, this is an average of $1.49 trillion a year. Below graph show US federal spending in 2015
The total spending was $3.7 trillion and the total revenue raised was $3.25 trillion. That’s a gap of 450 billion dollars. If taxes go down with $1.49 trillion yearly the gap will only become bigger. See below the projected graph without tax cuts.
The US will likely need to pay a higher interest rates on its bonds, which will lead to more costs of borrowing money, increasing the federal spending and creating a bigger fiscal gap. This will again force them to borrow more money at a higher interest rate and this cycle will repeat itself. Trump’s solution is to restructure the US debt by forcing Treasury bond holders to except a loss. Upsetting bond holders will lead to more fear on the market, higher interest rates and lower ratings of the bonds.
Another major promise from Donald Trump is that he wants to force US companies to not outsource abroad. The advantages for companies to outsource is that they can lower their cost, increase efficiency, focus on core areas, save on infrastructure and technology, increase access to skilled resources/employees, get time zone advantages and faster and better services. By restricting these, US companies will lose their competitive advantage. This will negatively affect the growth for companies leading to higher cost, less revenue and less profit. A company that struggles with costs cannot hire more employees. It will do the opposite - it will start firing people, leading to higher unemployment. Under such a scenario there will be limited GDP growth. The economic culture in the US is a flexible and open one and this helped them to become the biggest economy in the world. Protectionism is bad for economic growth and there has been no country in the world that has built a case to prove the opposite. By suggesting to build a wall with trade partners and withdraw from trade agreements, Trump will start the worst trade war since the great depression.
US has strong allies and friends in the world. Barack Obama has made a lot of efforts to improve the US relationships in the world. Especially after 8 years of a George W. Bush administration, he has done a great job. Donald Trump doesn’t think the US should continue this path. NATO members can be nuked according to him. Building strong relationships and maintaining them are crucial for business deals and economic prosperity.
The American Action Forum, a right-leaning policy institute based in Washington D.C., estimates that immediately and fully enforcing current immigration law, as Trump has suggested, would cost the federal government from $400 billion to $600 billion. It would shrink the labor force by 11 million workers, reduce the real GDP by $1.6 trillion and take 20 years to complete (Trump has said he could do it in 18 months).
The world is watching the US closely now to see what is going to happen and if they choose Donald Trump as their leader. If he gets elected and follows up partly or fully with his promises, there will be drastic economic consequences. The US will see their debt grow, their federal spending increase, less labor, lower GDP, a trade war and allies in the world turning their back towards the US. US companies will lose their competitive advantage. I leave it up to the US voters to decide on who they will vote for and hope they have the common sense to find the right candidate.
Posted on Sun, June 19, 2016
by Simon Snelder filed under