Donald Trump vs. the Economic Science

Last Saturday another state fell. Donald Trump’s victory in South Carolina moved him closer to the GOP nomination and once again showed people’s mistrust for the mainstream Republican nominees. However, gathering crowds of people and giving inspiring populist speeches is a small part of future president’s job. The main question any new leader will have to face is how to assure that the country grows steadily, the unemployment is low and the middle class get their pay rises. There are different economic policies and strategies from both parties’ nominees. Sometimes those are contradicting, but many of them have proved their economic efficiency over the past century. But there is a clear candidate whose economic plan is built on populism and theories, that were destroyed a few centuries ago. If Donald Trump is to elected president, we are to see a tough clash: Donald Trump vs. the economic science.

Although Mr Trump is a successful businessman, I assume, he is plainly not that good in economic theory. His populist suggestions may seem strange or tough from the political point of view, but they may be disastrous for the American economy, which only recently regained traction. Eight years after the Great Recession, it seems that everything is excellent – unemployment is just under 5 percent, GDP is growing at 2.6 percent. There is but one problem, which Trump is eager to use in his favor. The American middle class do not feel the recovery – wages are stagnant. His explanations of this are the easiest of all and “common sense”, so understandable by regular voters. In economics, however, common sense answers are not always correct.

One of Mr Trump’s unusual suggestions is building a wall with Mexico and deporting 11 million illegal immigrants back to Mexico. Aside from the enormous cost of such a decision, it will harm the US businesses and consumers. Right now, when the unemployment level is just under 5 percent and is getting lower, deporting immigrants will leave cheap labour-oriented businesses as hotels, restaurants and farms without the labour force. And as the average income of illegal immigrants is twice as low as the average for the US, not many Americans will rush to get the job.

Moreover, Donald Trump’s position on foreign trade is even more ridiculous. He suggests imposing tariffs on imports from China, Mexico and other countries to boost job creation and manufacturing. Such an economic policy has already been in use for a long time. Some of Trump’s policies are looking similar to the ones of European mercantilists of the 16th century. Unfortunately for Mr Trump, such policies proved to be inefficient, resulting in two hundred years of wars and stagnation. It not only makes goods more expensive for American consumers but also doesn’t add to jobs’ creation in the United States.

A tariff of 45 percent, as suggested by Trump, will only make Chinese goods 45 percent more expensive for the Americans. It is highly unlikely that US businesses will be able to compete with cheap Chinese manufactured goods and raw materials. Moreover, other countries are likely to respond with tariffs for American production. In the times of strong dollar, American exports will shrink even more.

Besides, Mr Trump believes that import tariffs will return jobs to the US. The problem is that they should be enormously high to persuade firms to produce in America. For example, the average salary at Foxconn Technology, manufacturer and supplier for Apple, has recently reached $400 a month – not a decent pay for an American worker. At the same time, paying an American wage will raise Apple products prices significantly, harming consumers. With such a big difference in wages, returning jobs is almost impossible.

Donald Trump is arguably unrivaled in political populism, but he isn’t getting along well with economics. The political proposals he makes are far from the economic reality. With strong opposition from fellow Republicans, Mr Trump will never be able to pass any of those laws through Congress. If you still do not believe that he is far from being a good economist, here is what he said after the New Hampshire primary: “Don’t believe these phony numbers when you hear 4.9 and 5 percent unemployment. The number’s probably 28, 29, as high as 35. In fact, I even heard recently 42 percent.” It is 42 percent, but only if you define students, pensioners and babies as unemployed!

By Filip Drazdou
Market Analyst at the Investment Fund