E Donald Trump Cannot Increase Aggregate Demand

The entire logic of Donald Trump's policy rests on the assumption by some economists that Trump can boost aggregate demand in the economy. However, it appears that the Fed and Trump want two different things. 

Donald Trump wants to give a supply side boost to the economy. However, even Arthur Laffer said that giving a boost through supply side economics only increases economic activity if the original taxes on corporations and marginal taxes on individuals are very high. In Ronald Reagan's time they were very high. Now they are not so high. But, Laffer has recently said that Trump's plan will work. 

Arthur Laffer Public Domain

However, the Laffer Curve was born this way:

The idea that lower tax rates could translate into higher total tax revenue is described by the “Laffer curve.” Legend has it that supply-side economist Arthur Laffer sketched the curve on a cocktail napkin at a Washington restaurant in 1974, showing it to then-Ford administration officials Donald Rumsfeld and Dick Cheney. At a tax rate of 0%, total tax revenue would, of course, be $0. At a tax rate of 100%, Laffer argued, it would also be $0, since the tax would kill all incentive for people to engage in the taxed activity. Therefore, he concluded, tax revenues would not keep rising with increasing tax rates. At some point, increasing tax rates would reduce total tax revenue—and diminishing tax rates would increase it.

But rates are pretty low now. Also, with Reaganomics, using Laffer's ideas, spending continued and the national debt doubled. Reagan pushed the US out of recession by doubling the national debt and by giving big tax breaks to everyone, including the poor and middle classes. 

It is unlikely that congress would go along with that now. The plan now is to cut taxes, mainly for rich people and corporations, and use private business to create infrastructure with that tax break. This infrastructure will be owned by the corporations that fund it! Private construction of infrastructure like toll roads are key to Trump's plan.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Norman Mogil 7 months ago Contributor's comment

I recall when the Laffer curve came out, our dept of economics referred to it as the "laugher" curve. It had no theoretical construct or empirical evidence--- just a whimsical notion that appealed to the right wing. Nothing has changed in that regard.

You are so right that Trump's trade policy will hurt aggregate demand, especially regarding taxing intermediate products that form the majority of US imports.

Barry Hochhauser 7 months ago Member's comment

My concern is that #Trump's plan calls for a trickle down plan where businesses and the rich will get big tax breaks and that will trickle down to everyone else. But I believe history has shown that this doesn't work since they just horde the savings for themselves.

Gary Anderson 7 months ago Author's comment

Trump cannot make those businesses expand. Those businesses, especially smaller businesses, have to perceive bigger demand for products before they will expand unless they feel they can capture a bigger market share. Where is that demand going to come from? Yes, it is likely that big companies will simply buy back more stock and small companies will hoard cash and bonds.

Jason Stewart 7 months ago Member's comment

I'm still not certain about the privatization of otherwise public roads. Profit seeking private developers should exacerbate the overall costs to build these public roads even if these costs are not immediately apparent. I also don't see the less profitable roads being developed at all.

Gary Anderson 7 months ago Author's comment

I agree, it is difficult to tell where this private road building is headed, Jason. Orange County privatized the fast lanes and it didn't work. Texas has experienced a bankruptcy, and certainly there is much discontent about private roads in Kentucky and most are no longer toll roads. And yes, the costs of building private roads could easily be inflated, like the defense contracts. It could be a real windfall for some companies, but is not an answer for people who do not want to or can't pay to use the private roads. Shunpiking is a popular sport by many people who think that people at the top are avoiding taxation and should pay for roads and who think many toll roads are not kept up correctly.