What the economic way of thinking suggests for Trump’s second term

However, when it comes to enacting economic policies, we should remember Thomas Sowell’s words: “There are no solutions, only trade-offs.” We live in a world of scarcity and limited resources. No one person, including policymakers, knows how to allocate resources in the most productive manner. The economic way of thinking acknowledges these limitations and helps us sort out this messy reality to determine more effective approaches to the economy.

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What does the economic way of thinking suggest when applied to our present situation? To address America’s economic problems, Trump can take three important steps that employ the economic way of thinking in order to revive the American economy: deregulate more, tax and spend less, and remove trade barriers.

Markets work best when they are least constrained by government regulations so resources can be allocated based on consumer preferences rather than the decisions of government bureaucrats. Unfortunately, the past four years have seen a significant increase in federal interference in the marketplace through regulations and mismanaged monetary policy. This eroded living standards, hindered job creation and entrepreneurship, and caused inflation.

The Federal Register, which contains government agency rules and notices, is a benchmark for the federal government’s involvement in the economy. After slimming to 61,314 pages during Trump’s first term, the lowest number since 1992, it reached an all-time high of nearly 100,000 pages this year under President Joe Biden.

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Therefore, Trump’s impulse to limit the federal government’s influence in the economy through deregulation and the Department of Government Efficiency is much needed, however unorthodox. His goal of removing 10 regulatory rules for each new rule proposed is likely to be highly positive for the economy, while reducing the burdens and costs of opening and operating a business will spark growth.

Trump also campaigned on reducing taxes by renewing or expanding the Tax Cuts and Jobs Act of 2017. Low marginal tax rates keep more dollars in the pockets of businesses and consumers, which they can invest or spend on goods or services, both of which spur economic growth.

However, there’s a catch. As Milton Friedman demonstrated, the true cost of government is total spending, not just what it collects in tax revenue. Limiting the government’s burden on the economic system requires a reduction in total spending. To avoid the risk of larger deficits and continued growth of the national debt, which is unsustainable, federal spending must be reduced. U.S. public debt as a percentage of gross domestic product currently sits at 120%, near the all-time high; reversing this trend is vital for future economic growth.

While Trump should focus on cutting spending to reduce borrowing and interest on the debt, this is just a start. Congress must also confront the unpopular task of reforming entitlement programs such as Medicare and Social Security. Interest rates remain high, and the government can’t continue to tax and borrow like there’s no tomorrow. In fact, our unfunded liabilities for Social Security and Medicare are quickly leading to the insolvency of both programs. Social Security is running a deficit projected at $4 trillion over the next decade, on pace for an automatic 21% benefits cut by 2033.

Trump also seems eager to impose tariffs — from 10-20% to potentially 100% on certain countries. Tariffs erode American prosperity and violate the most fundamental economic principle, comparative advantage, which shows that both parties benefit because we trade based on relative opportunity costs. Thus, trade is mutually beneficial and necessary for economic growth, while tariffs are counterproductive and act as a tax on consumers. Tariffs also cost the jobs of American workers who work in industries dependent on imported goods.

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Moreover, trade wars are destructive and fraught with economic delusions, such as that trade is zero-sum. Tariff threats will inevitably bring retaliation and potentially a trade war, which occurred after the 1930 Smoot-Hawley Tariff Act, exacerbating the Great Depression. 

The economy is a complicated system with literally trillions of moving pieces: the choices Americans express daily in the marketplace as consumers, workers, employers, and investors. Economic outcomes are constantly changing, depending on many factors, of which the federal government’s economic policy is just one. Focusing on the economic way of thinking is the best way for the second Trump administration to create conditions for future economic growth and prosperity.

Roger Ream is the president of the Fund for American Studies and the host of the Liberty + Leadership podcast. Anne Rathbone Bradley, Ph.D., is the vice president of academic affairs at TFAS.