OPINION:
A full inbox awaits President-elect Donald Trump when he returns to the Oval Office.
Most individual tax reductions in the 2017 tax overhaul expire at the end of 2025. He has promised to extend and enhance those. But even if he let those lapse, the federal deficit would rise from 6.5% of gross domestic product in 2025 to 6.9% a decade from now.
Those Congressional Budget Office calculations assume no added resources for disaster relief or to aid Ukraine and Israel. Even if Mr. Trump could diplomatically resolve their crises, other international matters and tougher hurricanes would take the deficit to 7%. Nvidia, Qualcomm, AMD and other U.S. chipmakers subcontract fabrication to the Taiwan Semiconductor Manufacturing Co.
With CHIPS and Science Act subsidies, the Taiwanese company is initiating production of advanced chips in Arizona. Still, its ecosystem of scientists, engineers and technicians requires that it manufacture the most advanced chips in Taiwan.
That makes defending Taiwan from a threatened Chinese takeover a U.S. economic security imperative. It also requires a better response to China’s military buildup while continuing some support for European allies that should better arm themselves.
If we are unwilling to cede to China’s control of sea routes to Middle East oil and abandon allies in the Indo-Pacific, Mr. Trump must boost defense spending by at least 2% of GDP. Entitlements, including Social Security and veterans’ benefits, account for 60% of federal outlays, while defense, interest on the national debt and discretionary spending account for 13%, 10% and 17%.
There’s not much room for cuts in discretionary spending. Hence, spending enough on defense requires significant cuts in social programs, higher taxes instead of renewing the 2017 tax reductions or much bigger deficits.
Domestically, Mr. Trump will benefit from stronger growth if he moderates his rhetoric about immigration.
Since 2016, the economy has been growing more rapidly — 2.5% — than the long-term pace assumed possible by the Congressional Budget Office and other economists — 1.8%. That’s thanks to boosts to consumer and investment spending from the 2017 tax overhaul and President Biden’s infrastructure program and industrial policies.
A Brookings Institution study estimates indigenous population growth and regular immigration permit the U.S. economy to add about 80,000 jobs monthly. Still, despite unemployment below 4% in the summer of 2023, the economy added more than 195,000 jobs over the next 12 months.
To maintain the kind of growth we’ve been enjoying, illegal immigrants will have to continue to find work in the U.S.
Homeless immigrants are instigating a perverse competition among the states. Texas ships illegal immigrants north to sanctuary cities, and now New York is offering incentives for them to leave, with Texas as their favorite destination.
We need to secure the border, but we also need to obtain 1 million to 1.5 million more immigrant workers each year above what existing laws regularly permit.
Artificial intelligence agents — specialized programs that can do the work of a travel agent or insurance adjuster — are coming online. Spending on AI equipment and services is estimated to rise from $185 billion last year to about $900 billion in 2027 and increase labor productivity by 1 percentage point or more yearly.
Lots of jobs will be created and destroyed. Still, the potential beckons to raise GDP growth to as much as 3.5% a year if we can retrain displaced workers, recalibrate secondary and postsecondary education to the emerging AI economy and get immigration policy right. This will require enhancing STEM programs, expanding Department of Labor-sponsored apprenticeships and providing financial aid to new high school graduates and displaced workers to relocate to programs that best suit them. Transitional supplemental income support for displaced workers while they retrain is also required.
An economy growing at 3.5% instead of 2% would substantially help address the budget deficit.
Many promises are made during campaigns, and Mr. Trump needs to rethink his list.
Eliminating taxes on tips, overtime pay and Social Security, enhanced assistance for long-term care and so forth would bust the budget and force the Federal Reserve to impose much higher interest rates or send inflation through the roof. Such large deficits could cause panic in bond markets.
A big tariff on China could be phased in over four years to generate about $90 billion a year but not the $750 billion annually his campaign promises would likely cost. Immediately imposing a 60% tariff on Chinese goods, a 10% tariff on other goods and mass deportation of illegal immigrants would cause a deep recession, derail investments in AI and render Trump 2.0 a failure.
Renewing the 2017 tax cuts, restoring our military, further directing trade away from China, deporting criminals, fixing immigration and cleaning up the wasteful aspects of Mr. Biden’s infrastructure and industrial policies is enough to chew on and would create quite a legacy at the end of four years.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
Please read our comment policy before commenting.