Many of Trump’s policies will further intensify income inequality

On a per-capita basis, the U.S. economy is more than twice as large as it was in 1973. But the average man, who works full time, year-round, earns less now than in 1973, after adjusting for inflation.  

Meanwhile, the share of income going to the most affluent one percent of American households has skyrocketed from about nine percent in the 1970s to more than 20 percent in recent years. That’s a redistribution of more than one trillion dollars per year.  

{mosads}This unprecedented disconnect between the average family and those at the top of the economic pile has generated tremendous discontent. Both Donald Trump and Bernie Sanders tapped into that discontent during the 2016 presidential campaign.

Since Trump has now moved from campaign rhetoric to policy making, this is a good time to assess which of his policies are likely to help working Americans, and which are likely to hurt.

Trump’s appeal to working Americans has overwhelmingly emphasized the effects of import competition and immigration. This has clearly been effective politically, but the economics behind these arguments are another story. It is certainly true that many American workers have suffered from import competition and/or immigration.

However, other factors are more important than either imports or immigration, in terms of explaining the rise of inequality. On the campaign trail, job losses in the American manufacturing sector are often blamed exclusively on imports, but changing technologies actually play a bigger role. In yesterday’s factory, large numbers of workers performed simple, repetitive tasks. Today, computer-driven robots do a lot of the work.  

Also, some proposed “solutions” run the risk of making things worse. If we slap high tariffs on imports, history suggests that other countries will retaliate by imposing tariffs on American exports. Based on the campaign rhetoric, it would be easy to conclude that trade is strictly a one-way street.

In fact, American exports are substantially more than $2 trillion per year. A full-scale trade war could lead to a global recession, and that’s not good for American workers. Finally, it’s worth noting that tariffs raise prices for American consumers.

When we look to other, more important sources of rising inequality, the Trump administration appears likely to do little, or to push for policies that will exacerbate the divergence between those at the top and those in the middle and at the bottom.

One of the biggest sources of increased income inequality is the financialization of the U.S. economy, described in Rana Foroohar’s excellent book, “Makers and Takers.” Deregulation of the financial-services sector transferred trillions of dollars to a small number of financiers, and it set the stage for the worst economic downturn since the Great Depression.  

The Dodd-Frank bill, while imperfect, established some common-sense protections for consumers, and it reduced the risk of another financial crisis. The Trump administration appears eager to rip out much of Dodd-Frank. This will be fabulous for Wall Street, at least for a while, but the average citizen could be forgiven for wondering what’s in it for him or her.

If enough regulations are removed, another financial crisis will become nearly inevitable, although it’s hard to predict when it will hit. When it comes, a repeat of the meltdown of 2008-09 won’t be good for the average American. 

Another major source of rising income inequality is that the education and skills of American workers have not kept pace with changing technologies. In the economist’s jargon, the demand for highly skilled labor has grown faster than the supply of highly skilled labor.  

Judging from Mr. Trump’s appointments in education, it appears that the next few years will be good for private, religious, and for-profit schools. Unfortunately, there is little reason to believe that this will produce much benefit for the next generation of American workers.

Mr. Trump campaigned for a major income-tax cut. Most taxpayers would receive a modest tax cut, but the biggest reductions — by far — would be for the most affluent. The top one-tenth of one percent would see their taxes slashed by about $1.1 million per year, on average.  Mr. Trump’s tax plan would also eliminate the estate tax, providing a windfall for the wealthiest two-tenths of one percent of the population.

Income inequality decreased dramatically in the middle decades of the 20th century, largely as a result of policies that were designed to help the bottom 99 percent of the population more than the top one percent. Those policies included strong support for education, a highly progressive tax system, strong financial regulations, protections for labor unions, and the minimum wage.  

Income inequality has increased in the last 40 years, largely because earlier policies were diluted or reversed. So far, the main thrust of policy proposals from President Trump is to maintain, and even accelerate, the anti-egalitarian policies of recent decades.

Charles L. Ballard is a professor at Michigan State University’s Department of Economics where he specializes in econometric analysis of trends in income inequality in different regions of the United States. 

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