When Donald Trump settles into the Oval Office in mid-January, his administration is expected to roll out policy changes on several fronts: taxes, health care, engaging with Asia, environmental regulation and so forth. While some actions will follow predictable paths, such as the attempt to recast health insurance policy, others will meet obstacles from either market realities or rule-making processes, or bring surprises, such as a new Asia pivot, according to the deans of Wharton, Penn Engineering and Penn Law.
According to Wharton dean Geoffrey Garrett, future U.S. leaders including Trump face two big challenges. One is to “increase growth rate from 2% to north of 3%, back to where it has been historically has been since World War II,” and the other is to ensure that “the benefits of that growth are more widespread.”
Trump’s policies would bring short-run economic gains that could last as much as a decade but end up saddling the government with far too much debt, said Garrett. He noted that stagnant incomes for many Americans over the past 15 years played a big role in Trump’s win. The takeaway from that for the future is to ensure equitable sharing of the gains from economic growth, he added.
Trump will back a conservative jurist to fill the Supreme Court vacancy created by the death last year of Justice Antonin Scalia, predicted Theodore Ruger, dean of the University of Pennsylvania Law School. He noted that Trump had said that he would make his pick from a shortlist of candidates he released last May. That list includes individuals who were selected by former president George W. Bush and who were confirmed but are currently sitting on the lower federal bench or state Supreme Courts.
“You can’t see technology the way you can see a factory in China or an immigrant in a job. So it’s harder to rally against technology politically.”–Geoffrey Garrett
“We have a fair degree of certainty that we will have a mainstream – in terms of high pedigree – but very conservative jurist,” said Ruger. “If that’s the only appointment that will be made in the next several years, the key doctrine will not change all that much, because Justice Scalia was already voting in that direction.” But if Trump were to be reelected for a second term, “we might see some real doctrinal shift,” he added, referring to the possibility of three more vacancies that could arise over the next eight years.
According to Penn Engineering dean Vijay Kumar, one area that could see unkind cuts is federal funding for R&D in science and technology. He noted that such funding has been falling steadily even with the 2008 stimulus by President Obama. Further, he pointed out that federal funding for R&D is currently only 0.6% of GDP, a far cry from the 2% during the “Sputnik Era” of the 1950s through the 1970s (so called for the frenetic space research activity triggered by the Soviet Union’s launch of the Sputnik satellite in 1957). Private companies have stepped in to pick up the slack in federal R&D funding to some extent, he added. “[But] I worry about the [funding] for the long moonshot projects that were funded by federal R&D.”
Garrett, Ruger and Kumar shared their perspectives in a panel discussion titled “Predicting the Future: What Will the Next Four Years Bring?” at Penn Engineering on November 30, 2016.
Trump’s infrastructure investment plans have every chance of becoming reality because “a big infrastructure spend” has bipartisan support, said Garrett. However, he called for careful consideration on three aspects. First, he suggested there should be a balance between public and private sector investments.
Second, Garrett emphasized the need to focus on longer-term productivity gains and not just on job creation in the short-run. While typical infrastructure projects would include roads, bridges, dams and the like, he proposed ventures such as 5G telecom networks or fiber-to-the-home projects that would boost productivity in the long run. Third, he had concerns about how the Trump infrastructure plan would be funded. “The Republicans would like to fund it through tax breaks, but that could become political football,” he said.
Health Care, Immigration Reforms
Trump also will carry out his plan to phase out the 2010 Affordable Care Act (ACA), otherwise known as Obamacare, predicted Ruger, who also teaches health law and pharmaceutical regulation. “If we were to catalog predicted policy changes after mid-January, I expect substantial repeal, reduction and defunding of important parts of the ACA,” he said. He noted that Trump’s pick of Tom Price as the next secretary of the department of health and human services “solidifies” that expectation. A physician and a Congressman from Georgia, Price has been a staunch opponent of the ACA. After a statute is passed to change the ACA, the government might allow a two-year period for people to continue to get health insurance from state exchanges before an alternative system is put in place, predicted Ruger.
According to Ruger, a repeal of the ACA would affect between 10 million and 15 million Americans. Most American workers get their insurance through their employers; an ACA repeal will mostly affect those who are self-employed or work for small firms, others who have preexisting medical conditions or those who earn just enough to not qualify for Medicaid, he explained.
“The rest of the system will keep going, and we will still be dealing with some of the cost control problems that we dealt with before the ACA that the ACA didn’t solve,” said Ruger. As for anticipated changes to the Medicaid program, he expected the Trump Administration to cut back spending, but convert some of that into federal block grants to states, where the latter have discretionary power on where to spend those monies.
On immigration reforms, both Republicans and Democrats agree that the existing H-1B visa program for U.S. companies to hire temporary foreign workers suffers from inequities, said Kumar. Many companies try to game the system and corner as many as possible of the 65,000 H-1B visas the U.S. issues annually to foreign workers, he explained. Trump will take steps to try and level the playing field and prevent manipulation of the visa program, he predicted.
Climate Change and Reality
Trump’s belief that climate change is a hoax will likely run aground when it meets the realities of economics, said Kumar. He offered several data points to make his case: “Electric cars are becoming viable. The cost of batteries is declining by about 12% a year. The cost of solar energy has declined by about 75% in the last five years. The cost of offshore energy has halved over the last three years. The cost of energy generation will be less than the cost of energy distribution, which means we will all produce our own energy.”
“We’ve become ruthlessly efficient in any kind of a production system, whether it is agriculture or manufacturing.”–Vijay Kumar
The Trump team will face obstacles as it attempts to convert into policy its attacks on the Environmental Protection Agency (EPA) and its regulations. For example, regulations on carbon emissions may change, “but they won’t change quickly,” said Ruger. EPA regulations have been codified and have gone through formal rule-making processes, and they can be undone only with another round of formal rule-making — a process that takes years and one which entails input from the scientific and environmental community, he explained.
Engaging with Asia
Trump has blamed international trade agreements for U.S job losses, but the role of technology is three times as important as globalization in its impact on lower skilled jobs, said Garrett. However, perception scores over reality here, he noted. “You can’t see technology the way you can see a factory in China or an immigrant in a job,” he said. “So it’s harder to rally against technology politically.”
Specifically, Trump has argued that China has taken away U.S. manufacturing jobs, and that the Trans-Pacific Partnership (TPP) that Barack Obama championed would leave the U.S. at a disadvantage. Garrett said he was indeed “very concerned” about how Trump would engage with Asia. “But there is a chance that a Trump presidency would do better things for the U.S. in Asia than would have been possible under Hillary Clinton,” he noted. While the TPP excludes China, “Trump is in a positon now to say that he could do a deal with China that would be good for them and for the U.S.,” he said. He clarified that while he wouldn’t bet on that deal materializing, “there is a greater chance it will happen under Trump than would have been true under Hillary Clinton.”
Understanding Job Losses
The loss of U.S. manufacturing jobs that Trump has vowed to reverse is an inescapable outcome of technology enabling increased productivity, said Kumar. “Manufacturing productivity over the last 30 years has gone up by a factor of two, both as a fraction of the GDP and in terms of the overall value created in society.” However, the number of jobs declined by 33% in those 30 years, he added. “That means that as technologists we’ve become a lot more efficient. We’ve become ruthlessly efficient in any kind of a production system, whether it is agriculture or manufacturing.”
Agricultural productivity has gone up, too, over the past century, Kumar said. “At the beginning of the last century, every farmer fed three other mouths. At the end of the century, every farmer was feeding 200 other mouths.”
Kumar noted that other jobs, too, are at risk, such as those of paralegals or secretaries, just like those of weavers at the beginning of the industrial revolution. “What is different now, particularly with the advent of data science, network science and artificial intelligence, is that the timescale of these changes is getting smaller and smaller.”
Learning from the Election
An understanding the factors that drove Trump’s election will inform future policy-making, according to Garrett. Trump won because of a combination of three factors, he said. They include anguish over stagnant incomes; sharper divisions between urban and rural voters and along gender lines; and a stronger showing by voters loyal to Trump while many of those loyal to Clinton stayed away from the polls.
“President-elect Trump comes in to a system that was designed with fears in mind about a single person taking too much power.”–Theodore Ruger
Voters who were expected to vote for Hillary Clinton but who didn’t go to the polls were mostly African Americans in urban areas, said Garrett. It helped Trump that others who were expected to stay away actually went to the polls and voted for him. “These were white Americans living in rural areas, and who happened to live in states that mattered, like Pennsylvania, Wisconsin and Michigan.”
“The cleavages in this election may have been starker than they have been before, but their structural roots have been there for a long time,” Garrett noted. For example, the Democrats haven’t won the white male vote since 1968, and the Republicans haven’t won the female vote since 1988. “That gender divide has been around for a long time,” he said.
In addition, pollsters didn’t factor in sufficiently that many Americans have had stagnant incomes for three decades, said Garrett. Here, he referred to supporting data that Wharton management professor Mauro Guillen had shared with him. It revealed that while real wages for Americans across all segments of the income distribution rose steadily in the 30 years between 1970 and 2000, they had flattened between 2000 and now.
“If you are living in a country in which 80% or 90% of the people have been experiencing flat incomes over a 15-year period, with the post-2008 downturn having an impact there, it’s no surprise that people are frustrated with the status quo,” he said. In fact, that phenomenon of stagnant incomes is true of 80% of the people in the entire western world, he added, citing a McKinsey study.
The takeaway from that last point for future leaders is that “economic growth is unbelievably important, and more inclusive economic growth is at least as important,” he noted.
Although Trump courts controversy with his utterances, his actions will be tempered by the shared balance of power between the executive branch, Congress and the judiciary, said Ruger.
The framers of the Constitution had put in place a system that keeps presidents in check. “President-elect Trump comes in to a system that was designed with fears in mind about a single person taking too much power,” he said. He recalled that the framers of the U.S. Constitution such as James Madison and Alexander Hamilton infused a healthy dose of “cynicism and distrust” that helped avoid a concentration of power with the President and shared powers between the executive branch, Congress and the Supreme Court. He also recalled Madison’s famous utterance that “ambition must be made to counteract ambition,” referring to a war of wits between Congress and the executive branch that helps protect the judicial system.
The “blocking effect” the framers of the Constitution wanted will be limited to an extent in a Trump regime where Congress is controlled by the Republicans, said Ruger. But when it comes down to law-making, he pointed out that “there are strong egos in Paul Ryan and Mitch McConnell, who won’t always get along with the Trump White House.” Ryan is currently speaker of the House of Representatives and Mitchell is the Senate majority leader.
Ruger also expected states like California and New York, and cities like Philadelphia, New York City, San Francisco and Los Angeles to use their powers to push for “progressive policy initiatives” in areas including environmental protection, education, technology and health care. “Within our pluralistic system with different nodes of governance, opposition and distrust of the central regime can be expressed and indeed is designed to be expressed,” said Ruger. “Whether you agree with Trump or disagree with him, there will be outlets for all of our voices.”
“The two big growth drivers [of the U.S. economy] have been globalization and technology…. The challenge is to get more people to benefit from them.”–Geoffrey Garrett
Ronald Reagan Part II
Garrett dubbed Trump as “Ronald Reagan Part II” for his pledge to cut taxes and increase government spending. He recalled that Reagan in his presidency (1981-1989) kept his campaign promises and cut taxes, increased military spending and scaled back economic regulation. Like Trump, Reagan, too, had said that increased economic growth will take care of the higher federal debt his policies would bring.
“The economy had a smart rebound, and [Reagan] was seen as one of the most successful of U.S. presidents,” Garrett said. “But he left a lot of debt that Bill Clinton had to deal with. He pointed to the Penn Wharton Budget Model, which predicts that Trump’s tax plan will boost the economy in the short run but also increase debt in the long run.
Markets share that short-term optimism, Garrett noted. “That is very positive, but it is not enough, because the two big growth drivers [of the U.S. economy] have been globalization and technology,” he said. “You can’t turn off either of those, and you shouldn’t, but [you can] ensure that more people benefit from these unbelievably powerful forces for change. The challenge is to get more people to benefit from them.”
Education must be a top priority to address those challenges, said Garrett. He pointed to “increasing evidence” that the big challenge in the U.S. today is not the lack of good jobs, but that there are not sufficient numbers of skilled people to take those jobs. For example, an increase in the number of people with coding skills would reduce the supply-demand mismatch for good jobs, he said.
“I would encourage the Trump administration to not only focus on growth, but to focus on growth that will broaden the filter and not narrow the filter of beneficiaries,” said Garrett. “Think about expanding the pie. Of course, you have to think about how the pie is divided, but everybody is better off [if] the size of the pie [is bigger].”
In order to get there, the emphasis must be on higher education, vocational skills and training, said Garrett. Countries like Sweden, Germany and Norway have adopted that approach to good effect. “They are small countries and they don’t control markets but react to them by investing in their people to make them well placed to do well at the leading edge of the economy and not play catch-up,” he said. “Countries like the U.S. have the resources to do that.”