A Nobel Prize-winning economist on Donald Trump's tax and tariff plans: 'This is just a really bad idea'
As the presidential election comes down to the wire, Quartz spoke with Simon Johnson, an economist at the Massachusetts Institute of Technology who last month won the Nobel Prize in Economics with colleagues Daron Acemoglu, also of MIT, and James A. Robinson, of the University of Chicago. Their work focuses on how countries become prosperous.
Quartz spoke on Friday with Johnson about former President Donald Trump’s economic plans. This interview has been lightly edited and condensed for clarity and length.
Quartz: You’ve just co-won the Nobel Prize in Economics, and your work focused on how nations build prosperity. Donald Trump has outlined a tax and fiscal policy he says he would follow that would break with more than a century of Republican tradition, enacting tariffs as high as 60% on goods from China and 10% to 20% on goods imported from other countries. What do you make of the policies Trump has proposed?
Simon Johnson: “There are two layers to what Trump is proposing. The one that he highlights is the tariffs. He calls himself the tariff man, and he says there’s going to be a very high tariff on everyone, and particularly on China. This is just a really bad idea. It’s not a bad idea in a complicated way, it’s a bad idea in a very simple way, which is that low-income Americans have a high import content of their consumption. It’s just a matter of arithmetic, there’s no complicated economics. If you raise the price of imported goods, there’s a hit to the incomes of all Americans, but more to lower-income Americans. It’s a terrible, stupid, and pointless negotiating tactic because a tariff is a tax on your own consumers. If you’re threatening to tax your own consumers in a way that they would obviously hate and resist, you’re not going to do it. So it’s pointless rhetoric.”
Quartz: What’s the second layer? Tariffs haven’t been Republican since Herbert Hoover signed the Smoot-Hawley Act into law in 1930, prolonging the Great Depression.
Simon Johnson: “Why are the billionaires rallying around Trump? Why do we see Elon Musk and Howard Lutnick from Cantor Fitzgerald and John Paulson and so on? Well, one thing to note is the import content of consumption for rich people is quite low. So, actually, he’s not threatening their pocketbooks at all with the tariff thing.
“A second piece is that he’s offering to extend or expand the tax cuts that he put in place in his first presidency, and those are disproportionately favoring rich people, directly and indirectly. See, the embrace of tariffs is Mr. Trump’s innovation relative to the modern Republican Party. Where Mr. Trump has not broken with the Republicans, [where he’s] in fact exacerbated their fall into fiscal insanity in recent decades, is with the tax cuts.
“When your economy is booming, you should be strengthening your fiscal accounts, you should be bringing in revenue, you should be reducing your debt relative to GDP. The key number is not the dollar amount of your debt, it’s how much debt you have relative to your economy, relative to your ability to pay.
“The Republicans became enamored of tax cuts above all else in the 1980s, with the Laffer Curve fallacy, the idea that if you cut tax rates, you get more tax revenue. It doesn’t work. The related idea is the trickle-down, that you cut the taxes of rich people and lower-income people get higher wages. Well, that doesn’t work either.”
Quartz: And yet it’s become Republican orthodoxy.
Simon Johnson: “The Trump presidency stands out as a moment completely contrary to sensible fiscal practice of any kind. I was the chief economist at the IMF and I studied this and worked on this in lots of places. I don’t favor precipitous fiscal consolidation ever. So the rich people supporting Trump maybe believe that they can stop the tariff policy or the tariff policy won’t go through, I don’t know. But they do believe that they can get the tax cuts and, as you know, the unfortunate reality of the American geopolitical position is that because the dollar is the reserve currency of the world, we can run large deficits for some time. But nobody knows for how long. Nobody knows when they’ll catch up with us. So when things are going well, like now, we should be reducing our deficits and reducing our debt relative to GDP. But they want to go massively in another direction, in their own favor.”
Quartz: The Nobel was awarded for you work on how different colonial regimes set the stage for contemporary economic success. How does that apply here?
Simon Johnson: “So we won that for studying a wide range of societies over history and arguing that [to be prosperous] what you want to have is more inclusive economic and political institutions and not what we call extractive economic and political institutions. Well, I would say the billionaires, and I’m happy to call them by name — Musk, Paulson, and Lutnick — these guys are working to establish a massive extraction of value from the American state and the American taxpayer and future taxpayers.
“When you see their ideas for basically abolishing the civil service and removing the professionalism of government at the federal level, I’m comfortable saying that they are aiming to establish an extractive state and to abandon the sensible and reasonable principles of inclusion around American institutions, and create something that favors themselves and not the rest of the American people. This is what populists have done since the beginning of the modern era—wrapped themselves in the idea that this is good for the common people and then they enrich themselves and ruin the country. It’s the history of Argentina over 120 years.
Quartz: It sounds quite similar to how Russia became even more of an economic wreck after the fall of capitalism.
Simon Johnson: “There was a lot of extraction in the 1990s, which then became consolidated under Putin, a single authoritarian figure and he squeezed out some of the oligarchs or even had them killed. Russia, for sure, has an extractive set of institutions now. It’s a set of economic and political arrangements that are only good for a few people.”
Quartz: In the U.S. we did settle this debate back in the 1790s in the Federalist Papers when we decided that an aristocracy, or what we call today an oligarchy, is not the way Americans wanted to be governed.
Simon Johnson: “That’s a very good point and that’s my read exactly of the founding documents. People like Kissinger, and on this point Hamilton and Jefferson substantially agreed, and of course Washington absolutely agreed, that you didn’t want to have too much power in the hands of one person, or a small set of people. You needed checks and balances at the federal level to make sure that the president couldn’t become an elected dictator. I am an immigrant to the U.S., I’ve been here 39 years and I like American political institutions. I understand that not everyone loves them and there’s a lot of tumult and so on, but I think they’ve served us very well. What Trump is threatening, by not accepting election results, by hollowing out the state and destroying its capacity to collect economic data to make professional decisions, and to have any kind of technical capacity that can stand up to political pressure, all of that is totally against any reasonable interpretation of the motivation and justification for the Constitution of the United States.”
Quartz: So let me ask you about the specifics of Trump’s tax cuts. The big one was cutting the corporate income tax level which went from 28% to 21%, and now he’s talking about bringing it down to 15%. Do cuts like that generate extra dollars that get invested in growing the economy?
Simon Johnson: “Not much and not generally. You will get an increase in stock prices because, of course, there’s more that will go to the shareholders and that’s your share buyback points, also. But you’re not going to significantly boost investment and you’re not going to particularly encourage entrepreneurs and new company formation because those guys don’t have a lot of corporate income to start with (or profit to tax).
“The tax cut as Trump proposes it would be a big giveaway — in part it’s for those [large] companies, but of course a lot of it is for the shareholders of those companies who are well-to-do Americans. There’s a reason that populists like to cut taxes: because people can feel good for a short period of time. And there’s a reason we call it populism, because when you throw fiscal responsibility out the window, you’re always popular. It is really striking and, of course actually ridiculous, that people like Elon Musk wring their hands about debt to GDP in the U.S. and then propose these incredible tax cuts, which is what drove the big increase in debt-to-GDP during the Trump administration.”
Quartz: With that in mind, what would it take to start attacking the national debt?
Simon Johnson: “The key thing is when the economy grows well, which it is doing currently, you want to collect the revenue, so don’t cut the taxes. I would shift the corporate tax [rates] back to where they were and undo a lot of the high-end tax cuts, letting tax rates rise in a reasonable fashion while the economy is booming, with taxes on very rich people. That’s entirely responsible and sensible. Now, that’s not the same as saying you have to suddenly close the budget deficit or suddenly reduce the debt, not at all. But you should allow the economic expansion to feed through into strengthened government fiscal accounts.”
Quartz: What about some of these targeted stimuli that Harris is in favor of but Trump seems to ignore: significant payments to parents for tax credits for children, down-payment assistance, removing income taxes on tips, and the like?
Simon Johnson: “The income tax credit is a good idea. This has really helped families with children and it should be extended to people who don’t have children. That definitely reduces poverty.”
Quartz: And tips?
Simon Johnson: “I understand the appeal, and I understand why some people like that, but I think you’re better off coming at this through the earned income tax credit and through how much people actually earn, and reducing the taxes or even giving refundable credits to people who make less money, so you’re encouraging people to work and you’re recognizing that you’re helping them survive.
“There’s also [a related] conversation to be had which is not very active right now, which is the extent to which corporate America benefits from the fact that the taxpayer supports the incomes of workers and therefore corporate America can get away with paying people lower wages.”
Quartz: You mean the Walmart scenario: You get hired and they drive you over to the welfare office to get your Medicaid and SNAP benefits.
Simon Johnson: “Exactly. That’s out of control. Hopefully, we’ll get it there.”
Quartz: A final question: From your research for the Nobel and other work, what do we need to do? How would we build prosperity in the U.S.?
Simon Johnson: “You need to maintain democracy, first and foremost. You mustn’t undermine the elections and you must recognize when you lose an election.
I do think that the middle class has been hurt by automation and by the way we’ve organized trade and the decline of trade unions, and I think we need to address that directly. At MIT we have a group that works on pushing artificial intelligence in a direction that would enhance the productivity and boost the job prospects of people without [college degrees]. I do think trade needs to be rethought so that we’re not allowing other countries to hurt us in an unreasonable fashion. Strengthening the middle class is important, and if the middle class is angry (and clearly some of them are) then that’s going to hurt your democracy. The worst thing to do would be to hollow out the government, cut taxes massively for rich people, and then tax the poor people through tariffs. That’s a terrible response to some important problems.”
