A CNNMoney story, “Trade War Would Wipe Out Gains From Tax Cuts, Penn Analysis Says,” applies two Penn Wharton Budget Model (PWBM) studies on trade and tax cuts. Patrick Gillespie points out that two of President Trump’s policies could have opposing effects on economic growth. If the new tariffs announced by President Trump lead to an all-out trade war, gains from the tax cuts could be washed away in the short run and swamped in the long run.
The Economic Costs of a Trade War
Major U.S. trading partners have already indicated they might retaliate to new U.S. trade tariffs recently announced by President Trump. New tariffs could, therefore, lead to a “trade war.” However, game theory also suggests that U.S. trading partners could eventually respond with “trade opening,” depending on the ultimate payoffs to each party in the trading partnerships.
We estimate that an all-out trade war would reduce GDP by 0.9 percent by 2027 and by 5.3 percent by 2040. Wages would decline by 1.1 percent by 2027 and 4.8 percent by 2040, relative to current policy. A trade opening would have the opposite effect: GDP would increase between 0.2 to 0.7 percent by 2027 and between 1.3 to 4.0 percent by 2040. Wages would increase between 0.3 to 0.8 percent by 2027 and between 1.2 - 3.6 percent by 2040, relative to current policy.
The downside risk of a trade war, therefore, is larger than the upside potential from a trade opening.
Wage Growth and Tax Cuts by Industry
A recent Bloomberg article by Mark Whitehouse, “Are Tax Cuts Driving Raises? It's Hard to See,” cites a Penn Wharton Budget Model (PWBM) study about the effects of the Tax Cuts and Jobs Act by Industry. The author analyses recent reports of wage growth to see if they are related to the tax bill passed this fall.
PWBM Infrastructure Analysis has Impact on White House
Philadelphia Inquirer reporter Erin Arvedlund digs into recent a recent post from the White House about PWBM’s analysis of the White House infrastructure plan and PWBM’s response. “War of Words Between Wharton and Trump White House,” compares the White House’s statement that PWBM lacks transparency with the model equations and methods made available by PWBM. PWBM is excited to see the White House engage with our work and we look forward to further discussion.
A Response to the White House’s Critique of PWBM’s Infrastructure Analysis
Last Thursday, Transportation Secretary Elaine Chao was asked in Senate testimony to respond to PWBM’s recent analysis of President Trump’s FY 2019 infrastructure plan. On Friday, the White House issued a formal response that is critical of PWBM’s analysis.
To quickly recap, the President’s infrastructure plan proposes that the federal government spend $200 billion in incentives to produce $1.5 trillion in total additional infrastructure spending across state and local governments, including private sector partnerships. PWBM analysis of the President’s plan estimates that total infrastructure spending, across all layers of government, would increase between $20 billion to $230 billion, including the $200 billion federal investment. We also estimate that this spending would have little impact on GDP.
Trump Infrastructure Plan Falls Short of Its Goal
A recent CNBC article by John W. Schoen, “Trump infrastructure plan comes up $1 trillion short of its funding goal, analysis finds”, discusses the President’s newly proposed infrastructure plan. Analysis by PWBM shows that the plan will fall more than $1 trillion short of its investment goal.
Will President Trump’s Plan Stimulate State Spending on Infrastructure?
New York Time’s reporter Jim Tankersley analyzes PWBM’s predictions for President Trump’s infrastructure plan. "Experts Doubt Trump's Infrastructure Plan Will Boost Economy," compares and further explores the implications of the differences between Mr. Trump's promises and PWBM's forecast.
Design Matters for Infrastructure Plan Outcomes
The Washington Post article “The Math in Trump’s Infrastructure Plan Is off by 98 Percent, Upenn Economists Say” highlights PWBM’s analysis of the White House FY 2019 infrastructure plan.
The White House FY 2019 Infrastructure Plan
President Trump recently released his updated infrastructure plan along with the Fiscal Year 2019 Budget. The plan proposes to increase federal infrastructure investment by $200 billion to provide incentives for a total new investment of $1.5 trillion in infrastructure.
However, based on previous experience reviewed herein, most of the grant programs contained in the infrastructure plan fail to provide strong incentives for states to invest additional money in public infrastructure. Indeed, an additional dollar of federal aid could lead state and local governments to increase infrastructure total spending by less than that dollar since state and local governments can often qualify for the new grant money within their existing infrastructure programs. We estimate that infrastructure investment across all levels of government would increase between $20 billion to $230 billion, including the $200 billion federal investment.
We estimate that the plan will have little to no impact on GDP.
For Teen Workers, Parents’ Education Matters
Teenage employment has declined significantly since the late 1990s. Using data from the Current Population Survey, Figure 1 shows that 63 percent of teens aged 16 to 18 worked in 1993, but that percentage fell to 41 by 2015.
Listen to a Discussion of President Trump’s Infrastructure Plan
Knowledge@Wharton features PWBM research in an article about President Trump’s infrastructure plan. The article also includes research from Virginia Tech’s Kevin Heaslip and Duke’s Henry Petroski.
A Discussion of the White House FY 2019 Budget
In a recent podcast and article “The White House Budget: What’s the Reality” by Knowledge@Wharton, the latest budget proposal by the White House was discussed by Kent Smetters (Wharton), Alan Auerbach (UC Berkeley), and David Kamin (NYU).
WEMBA Panel - Federal Tax Reform
The Wharton Executive MBA (WEMBA) program will be hosting a panel discussion on the recent federal tax reform and how it might affect businesses, which will feature our Faculty Director, Kent Smetters, along with two leading tax experts.
Though the event is only open to WEMBA students, we will live stream the discussion on our page for the event for anyone interested in watching. A recording will also be made available on that page after the event.
Date: Today, 2/16/18
Time: 12:30pm - 1:50pm
Live Stream: http://budgetmodel.wharton.upenn.edu/events-1/2018/2/16/federal-tax-reform-wemba-panel
Education and Income Growth
In the New York Times article “Why Is It So Hard for Democracy to Deal with Inequality?” Thomas B. Edsall relates the growth of income inequality in democracies to changes in voting patterns among those who are highly educated.
PWBM’s brief, “Education and Income Growth” was used to highlight that the incomes of highly educated people are growing in comparison to those with less education. The author finds that this trend motivates highly educated voters to support the continuation of current policy rather than policy reforms favorable to the working class.
Will federal dollars for infrastructure boost the economy?
The news blasts about America’s crumbling infrastructure are hard to miss. Data available at USAFacts shows that in 2015, 14 percent of America’s bridges were functionally obsolete and another 10 percent were structurally deficient. Meanwhile, in 2014, commuters spent an extra 42 hours stuck in traffic.
The White House proposes to spend $200 in new federal money that it hopes will subsidize an addition $1.3 trillion in new infrastructure spending by state and local government and private enterprises.
But will those dollars achieve a high speed economy with higher wages and GDP? Our new report, Options for Infrastructure Investment: Dynamic Analysis, finds that it depends.
Options for Infrastructure Investment: Dynamic Modeling
President Trump proposes to increase infrastructure investment by $1.5 trillion over 10 years by attaching incentives to $200 billion of new federal spending. However, this plan lacks details about implementation. We, therefore, consider three possible options.
By 2027, we estimate that GDP is between 0.0 and 0.5 percent larger than under current law, depending on which one of the three policy options is used. By 2037, GDP is between 0.0 and 0.4 percent higher.
By 2027, debt held by the public is between 0.4 and 0.9 percent larger than under current law. By 2037, debt is between 0.4 percent lower and 0.6 percent larger.
Changes to Federal Infrastructure Spending in the White House FY 2018 Budget
The White House Fiscal Year 2018 Budget proposes spending $200 billion in new federal spending over 10 years to stimulate a total new infrastructure investment of $1 trillion.
However, separately, other changes to infrastructure programs in the budget propose to reduce federal spending between $185 billion to $255 billion over the next 10 years, depending on whether certain changes are temporary or permanent.
On net, therefore, the White House 2018 Budget proposes changing federal infrastructure spending between -$55 billion to $15 billion over 10 years.
Data-Based Policy Analysis
PWBM is built in consultation with extensive data sources. A comprehensive list of our data store can be found here.
Economic Matters: An Introduction
Welcome to PWBM’s Blog, Economic Matters!
In this space, we plan to highlight working papers, discuss interesting facts we find in our data store, our estimation methods, parameters and current events.
Check back in for regular updates.
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W2018-1 Matching IRS Statistics of Income Tax Filer Returns with PWBM Simulator Micro-Data Output
Authors: Jagadeesh Gokhale