President-Elect Donald Trump faces tough choices that will determine whether U.S. growth continues to benefit the coastal elites or spreads a new prosperity throughout the country—with huge gains for ordinary investors.
Most individual tax reductions in the 2016 Tax Cut and Jobs Act expire at the end of 2025.
He has promised to renew and enhance those. But even with letting those lapse, the Congressional Budget Office estimates the federal deficit would rise from 6.5% of GDP in 2025 and to 6.9% in 2034.
Nvidia, Qualcomm and other topline U.S. chipmakers subcontract fabrication to the Taiwan Semiconductor Manufacturing Co.
With Chips Act support, TSCM will manufacture some advanced chips in Arizona. However, its eco-system of engineers and technicians requires that it make the most advanced chips in Taiwan with equipment solely manufactured by ASML in the Netherlands.
That makes the security of Taiwan and Europe an imperative for Nvidia, other high-tech companies and the U.S. economy to prosper.
The Europeans should better arm themselves, but some U.S. participation in NATO plus an effective presence in the Middle East and the Indo-Pacific would require increasing defense spending by 2% of GDP.
Entitlements including Social Security and veterans’ benefits are 60% of federal outlays, while defense, debt service and discretionary spending are 13%, 10% and 17%. There’s not enough room for discretionary spending reductions to adequately finance the military, so large cuts in social programs, raising new revenue instead of simply renewing the TCJA or much bigger federal deficits are needed.
Mr. Trump could get some help if he gets reasonable about deportations and immigration.
Since 2016, the economy has been growing more rapidly—2.5% annually—much more than during the Bush-Obama years and the 1.8% assumed possible by the CBO. That’s thanks to boosts to consumer and investment spending from the TCJA and President Joe Biden’s infrastructure and industrial policies.
Indigenous population growth and regular immigration permit the economy to add about 80,000 jobs per month but despite unemployment below 4% in the summer of 2023, the economy added more than 195,000 jobs over the next 12 months.
The strong growth we have enjoyed is enabled by irregular immigrants finding jobs.
We need to secure the border but also 1 to 1.5 million additional immigrant workers each year above what existing laws permit.
Artificial intelligence agents—specialized programs that can complete customer support and sales development assignments without human supervision—will boost productivity.
Spending on AI equipment and services is estimated to rise from $185 billion last year to about $900 billion in 2027 and introducing AI agents into the workplace, offer the opportunity to increase the pace by perhaps a full percentage point.
Many new jobs will be gained and others lost, but the opportunity beckons to finally raise GDP growth to 3.5% or 4.0% a year by retraining displaced workers, recalibrating secondary and post-secondary education to the emerging AI economy and getting immigration policy right.
This requires enhancing STEM programs, expanding Department of Labor sponsored apprenticeships and providing financial assistance to new high school graduates and displaced workers to relocate to programs that best suit them.
An economy growing at 3.5% or 4% instead of 2% would greatly ease budget challenges.
Many promises get made during campaigns, and Mr. Trump needs to rethink his.
Eliminating taxes on tips, overtime and social security, enhanced assistance for long-term care and so forth would bust the budget and force the Federal Reserve to enable much higher interest rates or send inflation through the roof. Large deficits could cause panic in bond markets and threaten the reserve currency status of the dollar.
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 percent 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.
Skillfully adjusting the TCJA tax cuts and entitlements reform, restoring our military, further directing trade away from China, deporting criminals and cleaning up the more wasteful aspects of Mr. Biden’s infrastructure and industrial policies would create quite a legacy for Mr. Trump.
With economic growth at 3.5% to 4%, annual stock market gains would not slump as currently feared by analysts at Goldman Sach and Vanguard. Rather prosperity would spread across the entire economy and stock market gains would be broadly based and well exceed the 9.1% annual pace of the last 25 years.
Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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