Peter Morici: Biden’s gift to Trump — golden opportunity to supercharge the economy

President-elect Donald Trump returns to Washington with a golden opportunity to continue the country’s accelerated economic growth.

Over the past eight years, U.S. GDP has increased 2.5% annually. This surpasses the 1.9% growth during the Bush-Obama years but trails the 3.2% performance of the Reagan-Bush-Clinton era.

The current growth rate was accomplished through Keynesian stimulus of both the Biden and Trump administrations — specifically the 2017 Tax Cut and Jobs Act (TCJA) and the 2021 Infrastructure Investment and Jobs Act. President Joe Biden’s supply-side industrial policies also contributed — booming manufacturing investment instigated by the CHIPS and Science Act and Inflation Reduction Act — as well as robust immigration. Yet since 2016, the U.S. federal deficit has grown to 7% of GDP from 2.9%.

In the decade prior to the covid-19 pandemic, the 10-year U.S. Treasury yield averaged 2%. But with larger federal deficits competing for available savings, a 4%-plus yield on 10-year Treasurys could become the new normal.

Trump was elected on a platform of tariffs, tax cuts, mass deportations, deregulation and a transactional foreign policy. But with $30 trillion in U.S. debt held by the public, that two percentage-point increase in the rate paid on outstanding debt boosts the U.S. deficit by 2% of GDP and that will constrain the Trump administration’s policy options. Regulatory reform and increased petroleum production require writing new administrative agency rules that will face legal challenges. On deregulation, Trump’s first term accomplished only limited success.

In renewing the TCJA, Republicans could tinker with tax rates, deductions and credits to benefit workers and seniors. But extensive additional tax cuts would send the U.S. deficit into orbit, spurring even higher interest rates, more inflation and even a bond-market rebellion.

Tariff trouble

A 60% tariff on Chinese goods could compensate U.S. manufacturers disadvantaged by Beijing’s subsidies, protectionist tactics and an undervalued yuan. The tariffs could be phased in over several years and also applied to Chinese components embedded in third-country imports.

Trump could ease — but not eliminate — some regulations and end the “woke” excesses in Biden’s policies to save money. But dismantling Biden’s industrial policies completely would derail the boom in U.S. factory investments now underway and greatly harm economic growth.

Meanwhile, a tariff on other U.S. trading partners would be met with retaliation and limit markets for America’s highly innovative semiconductors, AI software and just about everything else the U.S. exports. Alternately, it is possible that such tariffs would give the U.S. leverage: U.S. trading partners in Europe and elsewhere might be receptive to creating a common front against Chinese mercantilism in order to avoid new U.S. tariffs.

Productivity problems

Importantly, U.S. growth is not due to productivity growth. During the Trump-Biden years, labor productivity has advanced 1.9% annually — about the same pace as during the Bush and Obama administrations.

In 2024, the natural increase in the labor force enabled by population growth and regular immigration should have permitted employment growth of about 80,000 a month; instead, for the past 14 months the pace of job creation was 191,000 per month.

With the economy fully recovered in 2023 and at full employment, it’s evident that undocumented immigrants finding jobs permitted the country’s accelerated growth to continue. Trump wants deport millions of undocumented workers. But then who will make the products that tariffs and tax cuts are supposed to bring back to domestic manufacturers?

Better for the Trump administration to focus on aligning American workforce skills with the requirements of the developing AI-reliant economy. Investments in AI equipment and software is estimated to rise to about $900 billion in 2027 from $185 billion in 2023. This potentially could boost U.S. labor productivity by one percentage point a year or more and raise GDP growth to 3% or 3.5%.

Lucrative opportunities for people in high-tech trades are within reach if the U.S. can get high-school graduates into training and apprenticeship programs. But these trade-school students will need resources — housing, transportation, student loans —that are routinely given to college students.

Not least, much of America’s dynamic presence in high-tech is driven by scientists, engineers and entrepreneurs from outside the U.S., who are seeking opportunity and personal security in America. Keep in mind that the current leaders of Alphabet, Tesla and Nvidia migrated from, respectively, India, South Africa and Taiwan.

Mass deportations would send a powerful signal to the world’s best and brightest to find their opportunities someplace other than the U.S.

Peter Morici is an economist and emeritus business professor at the University of Maryland.