Donald Trump’s economic proposals would throw America into a deep recession, according to a Moody’s Analytics team led by a former adviser to Sen. John McCain’s 2008 presidential campaign. If cut back by Congress, Moody's said the economy would still face stagnation for all except the richest households.
The Moody’s team looked at three scenarios based on Trump’s proposals on taxes, spending, immigration and trade and assessed the proposals at face value: what he’s telling voters, a “Trump Lite” version, and a scenario where a GOP-majority Congress further limited the proposals by only paying for them with other spending cuts.
“The economy will be significantly weaker if Mr. Trump’s economic proposals are adopted,” wrote co-authors Mark Zandi, Chris Lafakis, Dan White and Adam Ozimek.
“Under the scenario in which all of his stated policies become law in the manner proposed, the economy suffers a lengthy recession and is smaller at the end of his four-year term than when he took office," they said. "By the end of his presidency, there are closer to 3.5 million fewer jobs and the unemployment rate rises to as high as 7 percent, compared with below 5 percent today. During Mr. Trump’s presidency, the average American household’s after-inflation income will stagnate, and stock prices and real house values will decline.”
Even under the scenario where a Republican Congress reels in Trump’s agenda—because his campaign proposals will cause the federal debt to explode—the economy “would still be diminished compared with what it would have been with no change in economic policies,” the report said.
“Those who benefit the most from Mr. Trump’s economic proposals are high-income households,” it continued. “Everyone receives a tax cut under his proposals, but the bulk of the cuts go to those at the very top of income distribution, and the job losses resulting from his other policies would likely hit lower- and middle-income households the hardest. The decline in wealth caused by lower stock prices and housing values would be felt by all households.”
The report’s takeaway is there’s nothing good about Trump’s plans under any scenario. Their analysis, using the same metrics as the Federal Reserve Board and the Congressional Budget office, is based on an agenda laid out in his speeches and interviews and on his website. While they note that quantifying Trump’s proposals “is complicated by their lack of specificity,” the contours are not hard to parse.
Trump has called for significant tax cuts, especially those favoring high income earners and businesses. He’s called for specific large spending increases, from building a border wall to deporting 11 million-plus undocumented migrants and increasing the Pentagon budget. He has called for rejecting international trade deals, renegotiating payments for foreign debt holders, and pulling back from globalization.
Moody’s cited an analysis by the Tax Policy Center estimating Trump’s tax code overhaul would cut federal revenues by “$9.5 trillion over the next decade compared to current law.” While tax revenues as a percentage of the gross domestic product “will fall to their lowest point on a sustained basis since World War II, how or whether the Trump cuts will be paid for is also unclear.”
In other words, Trump's tax cuts, if fully implemented, would lead to a federal fiscal crisis.
“To help defray the costs of the tax cuts and other spending, we assume that more than $1.5 trillion will be cut from other discretionary non-defense outlays over the next decade,” the authors write. “Additional meaningful cuts would require the elimination of federal agencies, mass layoffs, and the curtailment of many public services. This is not likely, and thus the bulk of the tax cuts, equal to $9.5 trillion over the next decade, are deficit-enhanced.”
In other words, Trump’s broad economic plan—at face value—either would be a giant borrowing scheme that would run up the federal debt, or it would gut an array of federal programs that now focus on social welfare, public health, science and technology, environmental protection, and more.
“Mr. Trump’s economic policies hurt the economy due in part to the large budget deficits and heavy debt load that result from his tax and spending policies,” Moody’s wrote, explaining how that would likely unfold.
Initially, tax cuts will prompt more consumer spending, “particularly early in Mr. Trump’s term before the negative impacts of higher interest rates caused by the large deficits take hold.” But soon after, “the increased government borrowing causes interest rates to increase, crowding out private sector activities such as business investment, housing, and consumer spending on vehicles and other durables.”
Those dynamics, with the economy beginning to contract, will then be accelerated by Trump’s immigration, trade and foreign debt policies.
“The economy also suffers as Mr. Trump’s immigration and trade policies act like a negative supply shock,” they wrote. “Requiring millions of undocumented immigrants to leave the country reduces the size of the labor force, and the higher tariffs on imports from two of our largest trading partners [China, Mexico] increases the price of imported goods. The result is a smaller economy and higher inflation, something akin to stagflation. "
Moody’s explained further, stating, “As the immigrants leave, the already tight labor market will get tighter, pushing up labor costs as employers struggle to fill the open job positions. Many of these positions will go unfilled… Mr. Trump’s immigration policies will thus result in fewer jobs, potentially severe labor shortages, and higher labor costs. This will ultimately cause businesses to more aggressively raise prices for their products. The tight job market and higher inflation prompts the Federal Reserve to normalize interest rates quickly, and then push rates above their long-run equilibrium. This monetary tightening contributes to the recession that hits about a year after Mr. Trump takes office.”
In other words, Trump's tax cuts would create a short-term spending boom followed by a painful long-term retiring of that debt where the economy would contract and interest rates would rise.
Moody’s realizes that what politicians promise is not what they’re likely to deliver—as other constraints are factored in. Thus, they looked at two watered-down versions of Trump’s agenda, with the greatest pushback coming from congressional Republicans who would want to pay for his plans with spending cuts. Under this scenario, Trump only gets some tax cuts and deports one-third of the undocumented migrants. Nonetheless, “deficit neutrality is [still] achieved by largely curbing non-defense discretionary spending,” they noted, which means gutting many key domestic programs.
“The U.S. economy is able to avoid a recession in this scenario, but growth comes to a near standstill early in Mr. Trump’s term,” they write. “Employment barely budges in his first two years, and over his four years as president just over 2.8 million jobs are created. This is about half as many jobs as would be created if there were no changes to current economic policy.”
Moody’s concludes by saying that perhaps Trump’s proposals “are simply a negotiating stance—he is asking for a lot more up front than he ultimately expects to get.” But “having said this, what he is asking for is fiscally unsound… The upshot of Mr. Trump’s economic policy positions under almost any scenario is that the U.S. economy will be more isolated and diminished.”
This is hardly making America great, as Trump likes to bellow. It is a template to run the federal government like one of his Atlantic City casinos where grandiose plans, other people’s money and vast overpromises collide in a maelstrom where the economic harms still echo. And it is giving license to a GOP-majority Congress to start dismantling domestic safety nets stretching back 75 years to Franklin Roosevelt’s New Deal.