REUTERS: Is it reasonable to expect to see a return to a 3 to 4 percent pace of U.S. economic growth under Trump’s policies; if so, by when, and if not, why not?
SALERNO: Trump’s economic policies are still a bit too vague, inconsistent, and incomplete to make a judgment about whether they will spur the economy to re-attain sustainable growth in the 3-4 percent range. The Fed’s inflationary monetary policy over the past two decades has caused a tremendous amount of business malinvestment and overconsumption by households, which have suppressed saving and capital accumulation and caused economic growth, labor productivity and real wages to stagnate. Trump has made a few contradictory statements about his plans for the Fed. Trump’s first order of business should be to pressure the Fed to put a swift and definitive end to its “unconventional” monetary policies, withdraw from credit markets, and permit interest rates to attain the natural level determined by voluntary saving and investment. A sound monetary policy is the first step toward stimulating vigorous and sustainable growth in the U.S. economy. What is important to restoring American prosperity is not hitting a measured growth rate, but increasing the pool of scarce resources that capitalists and entrepreneurs are able to allocate to productive investment.
REUTERS: Which of Trump’s economic proposals should he prioritize as President so as to give the biggest boost to the economy?
SALERNO: In addition to reining in the Fed and making its unaccountable bureaucrats answerable to elected officials in the legislative and executive branches, Trump needs to follow through on several of his fiscal and regulatory proposals. The following policies will stimulate growth by diverting resources away from wasteful and burdensome Federal activities and into productive uses in the private economy:
Repeal the Affordable Care Act which constitutes a heavy burden on private business and new capital formation and which will inevitably collapse into a socialized, one-payer system that wrecks the U.S. health care system. Permitting interstate competition among insurance companies is vital to replacing the Obamacare.
Slash the corporate tax rate and cut marginal and average income tax rates. Grant tax credits for child care. These fiscal policy changes will not only provide relief to long-suffering middle-class taxpayers but will increase capital investment by making the U.S. economy a relatively more attractive place to invest in and increasing saving by domestic households.
Deregulate the U.S. energy sector and free up entrepreneurs to use new technology to exploit the vast energy resources of the U.S. in natural gas, coal, and oil. This will boost economic growth and stimulate the creation of high-value jobs.
REUTERS: What proposal should he reconsider or drop?
SALERNO: Government spending programs, no less than taxation, siphon scarce resources and investible funds out of the private economy and waste them on Federal pork-barrel projects and destructive and unnecessary foreign military adventures. Trump should, therefore, scrap his plan to increase the Pentagon’s budget to “rebuild” the nation’s military. The U.S. already spends as much on defense as the next seven countries, including Russia and China, combined. This would signal the rest of the world that he is indeed serious about reversing the policies of his predecessors and seeking solutions to geopolitical problems through negotiation and diplomacy.
Trump should also reconsider his plan to spend $1 trillion plus on infrastructure projects, much of which will be financed by federal debt. Infrastructure programs are notorious for the “pork” they divert to crony construction companies and unions. Allow capital markets and entrepreneurs to determine which capital investments are most valuable to consumers.
Do not raise tariffs or restrict quotas on China, Mexico, Canada etc. This will only raise prices and reduce real wages in the U.S. and provoke retaliation from these countries crippling U.S. export industries and destroying American jobs. Instead, withdraw from and do not negotiate multilateral trade agreements such as NAFTA and TPP, which infringe on U.S. sovereignty and do not promote true free trade, but rather enable governments to collude in “managing” trade to benefit select domestic firms and cronies. Negotiate bilateral “deals” with individual countries to reduce tariffs and abolish import quotas.
I am generally cautiously positive on the outlook for the economy under Trump.
REUTERS: Have you been asked to advise or work with the president-elect during the transition or after the inauguration, and if so, what in what role?