How Will Trump Help the Economy?

Judging from the stock market investors believe that great economic times are just ahead. How will Trump help the economy, or will he? Judging from what the president elect has said we can hope to see a stimulus program focused around a long overdue fix of American infrastructure. Then there is all that corporate money sequestered offshore that could find its way back to the USA. And last of the three legged stool of Trump economics is a lot of tax breaks. Assuming that he can work with congress or through his various administrative appointments to accomplish these goals how will that work out?

Tax Breaks and Jobs

The underlying assumption of supply side economics is that if you don’t tax investors so much they will not only have more money but will invest it, create jobs and stimulate the economy. Considering the loss of jobs in the USA over the years, that would be a nice end result. However, The Washington Post writes that Trump’s tax breaks may not be enough to keep jobs in the U.S.

The incoming Trump administration has signaled that it will use subsidies and other business incentives to keep jobs in the United States, seizing on a popular strategy that state governments have adopted to lure businesses to their towns and cities. But there is little evidence the tactic can succeed in the international competition for manufacturing, economists say.

While the subsidies might encourage a firm to locate in one state instead of another, data suggests that they have less effect on a company’s decision to move abroad, said Daniel Wilson, an economist at the Federal Reserve Bank of San Francisco.

The jobs that get shipped offshore are low skill labor and the cost difference in paying wages and benefits in Mexico versus the U.S.A. is so great that states cannot pay a high enough incentive to keep those jobs at home. So, even if Trump tax breaks encourage investment at home it will not be for low skill assembly jobs.

Corporate Offshore Accounts

Trump wants to make deals get U.S. corporate cash back in the U.S.A. Will this Trump plan help the economy? Fortune writes about a likely pharma M&A boom occasioned by offshore cash.

For years, big U.S. drug makers have turned to acquisitions of foreign companies to put their overseas cash to work, rather than bring it home at a 35% tax rate. Trump has proposed allowing repatriation of this cash at a 10% tax rate, hoping some of it will be spent on hiring and investing in their businesses.

However, drug makers are much more likely to spend this money on acquisitions that could revive their drug development pipeline by acquiring smaller peers with promising offerings, as opposed to risking more of their own dollars on research and development, corporate executives and dealmakers say.

The likely effect in the pharmaceutical industry of corporate cash repatriation will not be job creation but mergers and acquisitions which are commonly accompanied by downsizing of duplicated jobs.

Infrastructure Repair

To the extent the fixing bridges, highways and dilapidated airports employs American workers that should be a good thing for the economy. The issue is short versus long term benefits. Forbes asks is Trump infrastructure smart?

Government stimulus produces a short-term boost to employment and GDP. The bad effects show up later: bridges to nowhere, bullet trains to the boonies and misallocated capital that could otherwise have been available for the private sector.

Fixing infrastructure that results in a more efficient, productive and growing economy is good and pork barrel projects for every state, for which congress is famous, are really bad.