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Trump and the Issues

CASCADE article featuring EC faculty members Anca Cristea, Mark Thoma, & Tim Duy

The president himself may have said it best: “History is watching us now.”

Those were Donald J. Trump’s words in July, when he became the Republican nominee for president at the party’s national convention in Cleveland. Now the Trump presidency is well under way, with an ambitious lineup of policies and proposals that trigger broad questions about the future of America.

Social scientists in the College of Arts and Sciences—three from political science, three from economics—were asked to dissect issues in play under the new administration: immigration, trade, the economy, health care and political movements. They explored the key elements underpinning these topics and what’s at stake.

Anca Cristea—Trade

Associate professor, Department of Economics

Interests: international trade, industrial organization, applied econometrics

Which is the better path: making international trade as open and fluid as possible? Or protecting US industries by raising the cost of imports? What happens to the average worker under either scenario?

Cristea is an empirical trade economist who assesses trends through statistical analysis. She studies the global benefits of easy movement of goods, services and people and the impact of trade on the environment and workers.

Trade generally lowers the cost to make goods and services, but it creates winners and losers when production is moved to locales with lower labor costs.

It’s better for business to have easy access to the global playing field, Cristea said—but that can come at the expense of workers whose jobs are outsourced to non-US competitors.

RECENT HISTORY: For decades, the US has generally not taxed imports or taxed them minimally—say, 2 percent on manufactured goods. Manufacturers who ship a $20,000 car from Japan pay about $400 in import taxes, for example.

The theory, Cristea said, is that making trade free or inexpensive encourages countries to play to their strengths. Businesses stick to producing what they do best, export the surplus, make a profit and grow; they save money by importing what would be expensive to produce or procure domestically.

But the US has shed about five million manufacturing jobs since 2000, which critics blame on free trade.

CHANGING THE JOB POOL: The new administration is trying to reverse this trend; proponents of trade protectionism believe it will restore a substantial number of manufacturing jobs. But research indicates that advances in technology are more important than trade in explaining the decline in manufacturing employment.

“Protecting trade is not going to preserve jobs lost to increased automation and technological development, both of which tend to be cheaper than human labor,” Cristea said. “These jobs are not going to come back.”

As US employers have moved all or part of their operations abroad, manufacturing jobs have dropped. But some firms relocate only part of their business and the savings allow them to retain and expand higher-paying jobs in the US, Cristea said—jobs in research and development, marketing and sales, for example.

In fact, at the same time that the US was losing manufacturing jobs, it was adding 53 million jobs in services, Forbes magazine reported—in sales, housekeeping, nursing and teaching, for example. Of these new jobs, about 60 percent were in higher-paying occupations than the jobs lost.

TRADE DEFICITS: The new administration wants to correct trade imbalances with countries such as China and Mexico, Cristea said, but it’s important to understand the nuances of this issue.

A trade deficit means that the value of a country’s exports is lower than the value of imports. There are two kinds of trade deficits: bilateral and global. The former refers to trade between two countries; the latter, to the total value of a country’s exports minus the total value of imports.

It’s misguided to focus on bilateral trade deficits as a measure of economic health because those figures don’t factor in trade with third parties. Consider Mexico: In 2015, the US used almost 70 percent of that country’s imports for its own exports, although that’s not reflected in the $50 billion US trade deficit with Mexico.

It’s better to focus on global trade deficits and to keep them from growing in the US. The current figure—$500 billion—is about 2.5 percent of the value of all US goods and services. This is the important deficit to watch, Cristea said—countries continue to invest in the US economy but the global trade deficit could eventually raise concerns that they won’t get a return on that investment.

Mark Thoma—Health Care

Professor, Department of Economics

Interests: debt, unemployment, interest rates, economic policy, health care

The difficulties Republicans have had replacing former President Obama’s Affordable Care Act leave the country with the same question that has persisted for years: How to control health care costs while ensuring or expanding coverage?

Millions of Americans get coverage under Obama’s signature health law—a record 6.4 million signed up in 2017, for example. But premiums for users and costs to government are rising significantly—the Congressional Budget Office warns that at the current pace, spending on federal health care programs will drive budget deficits and debt to record levels over the next 30 years.

Thoma is a macroeconomist who studies both monetary and fiscal policy, with a focus on the US economy. One of the most important issues for the economy is health care—and Thoma has followed it closely.

Thoma is well-known for his column in The Fiscal Times and his blog Economist’s View, which Nobel Prize winner and New York Times columnist Paul Krugman called “the best place by far to keep up with the latest in economic discourse.” Science Magazine listed Thoma as one of the 100 most-followed scientists on Twitter and he is a regular source for the national press.

The health care debate will ultimately hinge on a philosophical question rather than an economic one, Thoma said: Is health care a commodity or a right?

If the country decides that health care is no different from any other good, Congress could choose to give the health insurance industry more latitude in determining who receives coverage. However, if health care is seen as a right, that could impose a moral obligation on lawmakers to ensure that those who can afford it help pay for those who cannot.

In such a system, Thoma said, the government—not private insurers—would be a logical authority to oversee coverage.

THE ACA AND BEYOND: Regardless of whether the Affordable Care Act continues or is eventually replaced by a Republican alternative, Thoma said the underlying principle is the same. For government-run health insurance markets to work, people must be required to participate. If healthier people don’t have to buy insurance, Thoma said, everyone is in trouble.

Health care isn’t like other goods and services. The costs to individuals can be astronomical, arising without warning—costs to treat a serious illness or an injury. Most people can’t save enough to prepare for these expenses or afford them when they happen.

The solution is to pool money in an insurance fund—everyone pays and that money covers major expenses for the unfortunate. The snag, Thoma said, is the cost, or premium, to join. It’s an average of the expected costs for both healthy and unhealthy members, so it’s automatically a bad deal for the healthy—it’s more than their expected costs, so why not skip the expense and gamble on not getting sick or injured?

To avoid this scenario, the ACA forces people to buy health insurance by charging those who would otherwise go without. But it doesn’t charge enough, Thoma said—too many healthy people still leave the pool.

Without a mandate that everyone buy health insurance, or a steep penalty for going without, the downward spiral begins: As those in good health leave the pool, premiums rise among those remaining, more people leave and eventually only those with high health-care costs remain, facing premiums that they can’t pay.

That’s bad for everybody, Thoma said, because we’ll all end up paying more for health care. Those who can’t pay for insurance will get care in emergency rooms or through other costly means, and insurers will cover those costs by raising everyone’s premiums.

SWITCH TO SINGLE-PAYER? An alternative to people buying (or not buying) health care is the “single payer” approach—residents pay taxes to the state and it becomes the single payer, providing health care or contracting for it with private organizations. This approach could become popular, Thoma said, as more people join Medicare, a single-payer program that provides health insurance for older Americans who have paid for it through a payroll tax.

But regardless of the plan, Thoma said people need help making informed choices about treatment.

Say the issue is cancer—is surgery the answer? What about radiation or chemotherapy? Which hospital? Health insurers must provide guidance. With private insurance, insurers decide what procedures they will cover depending on how high a premium the client is willing to pay. Alternatively, government can regulate health care and determine which procedures are appropriate.

BENDING THE COST CURVE: Be wary of lawmakers arguing that a looming fiscal crisis makes urgent the need for a health care overhaul, Thoma said—rising costs must be slowed but we haven’t arrived at a budgetary crisis.

Rising health care costs drive increases in the national debt. But interest rates for loans remain relatively low and foreign stakeholders continue to buy up our debt—both suggest that the economy is sound and that there is no looming budgetary crisis.

Tim Duy—The Economy

Professor of practice, Department of Economics, and director, Oregon Economic Forum

Interests: macroeconomics, monetary policy, local and regional economics

The US economy grew 1.6 percent in 2016, down from 2.6 percent the year before. Forecasts are for around 2 percent growth for the next 10 years.

Is that too fast? Too slow? Or just right?

Economic growth is the increase in the amount of goods and services produced over time, and it relates directly to the number of jobs available. If growth is too slow, jobs vanish; if it’s too fast, there aren’t enough workers to keep up, and that causes rising prices and inflation.

What’s a president to do?

The Trump administration is acting on several fronts as it manages the economy—but that’s a delicate dance, economist Tim Duy said, and the wrong move can cause the nation to stumble.

Administration officials are weighing increased spending and tax cuts as they debate the proper rate of economic growth. Were Duy privy to that discussion, he’d be counseling caution regarding any major moves.

FIRST, DO NO HARM: Despite job losses in manufacturing, President Trump inherited, overall, a healthy economy, Duy said—low unemployment, solid wage and job growth, rising workforce participation, low inflation and low interest rates.

Stealing a page from the Hippocratic Oath, he said the best policy for the new administration would have been to “do nothing,” for fear of harming economic momentum.

Trump officials have other plans. The president has made tax reform a priority and has proposed broad-based personal tax cuts. Tax cuts that favor the wealthy might temporarily boost the economy, Duy said, but it would be more effective if those tax cuts went to the middle and lower classes.

Infrastructure spending—which Trump has also proposed—helps the economy if it raises productivity. Road projects, for example, can reduce shipping costs, which benefits producers and consumers, Duy said.

But other moves could slow growth, he added—restricting immigration, for example, hurts the labor supply in many sectors.

THE “D” WORDS:  Some people fear that a slowdown in economic growth could cause deficits and debt to grow.

Duy doesn’t share this worry. Annual deficits of $400 billion have pushed US debt to $20 trillion. But economists haven’t identified the amount of debt that is problematic for a country such as the United States, Duy said, which doesn’t truly face the prospect of bankruptcy. As a last resort, he noted, the country can pay off debt by printing more money—although that can trigger inflation.

Duy is more concerned that the administration will trigger excessive economic growth—that is, more than the workforce can accommodate. Because that can cause inflation, officials will likely try to avoid that scenario by raising interest rates, making it more difficult for businesses to borrow money and grow.

WHITHER THE FEDERAL RESERVE: Those officials are with the Federal Reserve—they set US monetary policy, and the makeup of their board is one of the most intriguing questions under the new administration, Duy said.

The Reserve’s job is to maximize employment and keep prices stable, and they do this by adjusting interest rates to keep the economy growing at a steady-but-sustainable rate. The current board would likely raise interest rates in response to a surge in the economy, to keep that growth in check, Duy said.

The operative term is “current”: Given upcoming departures from the Reserve board, Trump could appoint as many as seven members over the next two years, dramatically swinging fiscal policy from controlling growth with high interest rates to more likely freeing it with low ones.

“If you’re worried about the Federal Reserve offsetting your efforts to stimulate the economy,” Duy said, “you stack it with people who favor lower interest rates.”

He favors the appointment of “run-of-the-mill centrists” less likely to tip the economy into recession through extreme swings in interest rates.

Full Article: http://cascade.uoregon.edu/spring2017/features/history-is-watching-us-now-trump-and-the-issues/