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Tuesday, October 23, 2018

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Manufacturing is key to Trump’s bold economic plan


Since President Trump has assumed the position of chief executive, he has began to implement the policies he espoused on the campaign trail. During the campaign Trump focused heavily on protectionism for the economy.

Operating on the assumption that Trump will be able to complete all, or least most, of his economic objectives in the coming years, the economy will likely continue to grow, but at a diminished rate. There isn’t any data suggesting Trump’s policies will cause a recession outright. It is unlikely Trump’s economic plans will result in the American golden age he has described, given global trends. 

Janet Yellen, the head of the Federal Reserve, more-or-less committed to an interest rates hike in the coming years, even going so far as to say the Fed’s goals included “three quarter-point increases in 2017.” In the past, the Fed remained cautious when considering raising rates, as rates have been at or near zero since the great recession of 2008. It raises interest rates in an attempt to meet inflation targets.

When inflation rises, the level of unemployment lowers. Given that empirical relationship, raising the interest rates would likely cause a hiring slow-down.

Plainly, the higher the interest rates, the harder it is for companies and people to invest and spend. What follows is a diminishing of employment. Of course, a 0.25 percent increase would likely not cause the unemployment rate to skyrocket. Rather, it would most likely continue decreasing, but at a lesser rate compared to the pre-hike period.

Trade gets Trumped

Another large part of Trump’s economic plan has to do with a complete reconstruction of the United States’ trade policies. Specifically, Trump took actions in his first few days to raise trade barriers. This is an effort to stimulate domestic manufacturing, which will almost certainly stimulate in the short term as a direct result of these policies.

However, the trouble with protectionist policies is that, often, the domestically produced goods are not as high quality or as low a price.

The average world tariff rate in 2012 was around 3 percent. If Trump makes good on his promise of increasing tariffs on China to 25 percent, it would likely cause a downturn in the short-term. Domestic manufacturing might not initially be able to react to the influx of demand for American goods, resulting in an increase of prices.

However, it has been decades since a world economy of the United States’ magnitude implemented protectionist policies. Perhaps Trump will create a domestic manufacturing revolution.

Perhaps “Made in America” will be imprinted on more than one in 10,000 products. Trump’s economic experiment is bold and new, but his presidency is only one week old. Only the coming years will determine his experiment’s success.

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