Trump's immigration promises face reality check, expert warns

• Thanks to the role of the dollar in the global financial system, the USA can accumulate debt more easily than other countries. However, politicians will eventually have to address the growing public debt.
• Currently, no one knows how to tackle it effectively. Some of Donald Trump's ideas could exacerbate this problem, Wojciech Kopczuk mentioned in an interview.
• The economist believes that for most people, it doesn’t matter that the future president is advised by the richest man in the world. – Clearly, voters are more concerned with their own incomes, he states.
• He points out that around 2033 in the USA, the accumulated surplus in the pension system will be depleted, and the current stream of contributions will no longer be sufficient to cover expenses.
• If there is no legislative response, pensions will have to automatically fall by 20% to maintain the legally required balance of this system, our respondent notes.

Are you surprised by the rise in popularity of the Republicans? I'm not even talking about Donald Trump's victory in the presidential election, because the polls suggested such a possibility, but rather about the change in societal attitudes. The labour market in the USA is in good shape, with unemployment near historical lows. It might seem that this would favour support for the ruling Democrats. But that didn’t happen.

Wojciech Kopczuk, Professor of Economics at Columbia University in New York: The US economy is in decent shape, but this does not translate into consumer confidence or optimism. It is likely a consequence of high inflation. Today it seems that inflation has been contained, but in recent years it was the highest in several decades, influencing income distribution in the economy. The real incomes of the lowest-paid Americans have increased because of the low unemployment rate. However, in the middle of the income distribution, the effects were less pronounced. These people largely voted for Trump.

Did poorer Americans, whose real incomes increased despite inflation, vote for the Democrats?

This group generally has low voter turnout. In discussions about which social groups voted how, it is often overlooked that only shifts in preferences occurred, not a radical change. For example, in this year's elections, more Latinos and African Americans supported the Republican candidate than four years ago, but most still voted for the Democratic candidate. These changes in preferences matter when the difference in support for candidates is 2 percentage points.

How large is the group of people who have been affected by inflation?

I don't know, but it doesn’t matter that much. It also depends on their perception. People often think that when prices rise sharply, it’s the government's fault, and when wages rise equally sharply, it’s their own achievement.

In previous election campaigns, the issue of income inequality was significant. It gained prominence with the 2014 book by Thomas Piketty, "Capital in the Twenty-First Century". His thesis was that inequalities are entrenched because the more affluent people are in power, the more government policies favour the rich. What has happened to income inequality since then?

Income inequality remains high, although the COVID-19 pandemic temporarily reduced it. Piketty’s narrative was exaggerated, but there is awareness of this issue in American public life. There is still ongoing discussion about how to reduce inequalities, e.g. by increasing taxes on the wealthiest individuals. However, in recent years, this topic has not been as prominent in public debate as before, although Democrats would like to maintain those emotions.

I'm asking about inequality because Donald Trump's election programme seemed very favourable to wealthy Americans. It included a proposal to cut taxes for companies and the wealthiest households. Trump is advised by the richest man in the world, Elon Musk. Doesn’t this concern middle-class voters?

This is a topic of importance to a certain segment of society, covered, for instance, in "The New York Times". But for the majority, including those in smaller towns, it doesn’t matter. The Republicans’ favourable policies for the wealthy were not a burden for them either in polls or in elections. Clearly, voters care about their own incomes.

And voters believed that Trump's policies, even if they benefit big companies and the wealthiest Americans the most, would ultimately "be the rising tide to lift all boats"?

You could say that. Tax cuts are generally viewed positively for the economy. If people don’t see negative consequences for themselves, they support them.

It’s paradoxical that high inflation, which burdened the Democrats, influenced the election results, but the winning candidate's programme will be pro-inflationary. How much might Trump’s proposed tariff hikes and immigration restrictions increase inflation in the USA?

This will likely slightly increase inflation, but the effect isn't expected to be strong. I wouldn't anticipate anything comparable to inflation from a few years ago. The relative prices of imported and domestic goods will certainly change. Some economists argue inflation won’t increase at all because rises in imported goods prices will be offset by falls in some other goods prices. This could be the case if tariff increases aren't accompanied by an increase in the money supply, i.e., if monetary and fiscal policies aren't expansive. In my view, this is a simplification, and there will be some increase in inflation, but it won’t be large.

What about the announced immigration restrictions? Could these accelerate the growth of wages and, consequently, prices?

This might happen, especially in sectors where most illegal immigrants work, like agriculture and construction. However, I doubt Trump will be able to reduce immigration as much as he promises.

As long as the US economy is performing well, many people will want to come here. This migration pressure will always exist, and the USA cannot easily close itself off from immigration. This is currently the main source of growth in the number of active workers. The USA has the same problem as Europe, although less severe: low birth rates. Without immigration, there will be problems maintaining the social security system. This would significantly burden public finances. You could argue that the alternative to immigration is a crisis.

Donald Trump declares that his policy will reduce the deficit in the public finance sector and halt the accumulation of public debt.

He also promises tax cuts, which will have the opposite effect. Overall, I don’t see Trump having a plan that could genuinely reduce the enormous deficit today. But the Democrats weren't much different from him in this regard. Concerns about the condition of public finances would exist, regardless of who had won the election. The main difference is that Donald Trump will emphasise tax cuts, while Kamala Harris would have focused on increasing spending.

The rapid rise in US debt has been discussed at least since 2011, when the S&P agency removed its top credit rating. That was over a decade ago, and public debt continues to grow, without evident negative effects. Is there a limit to such expansive fiscal policies?

No one knows. At one time, some economists claimed there was a hard limit that the United States could not exceed, but it was surpassed long ago. The USA isn’t a typical country in this regard. The dollar serves as the main reserve currency, ensuring Washington a high demand for Treasury bonds. For now, no crisis appears imminent. But that could change swiftly. With today’s geopolitical tensions, it's easy to imagine a scenario where Asian countries stop buying US debt.

You mentioned potential problems with maintaining the social security system. When can they be expected?

They will become very apparent around 2033. At that time, the accumulated surplus in the pension system will be depleted, and the current stream of contributions will no longer be sufficient to cover expenses. If there is no legislative response, pensions will have to automatically fall by 20% to maintain the legally required balance of this system. Of course, there will always be the option of subsidising this system from the budget, raising contributions, or increasing the retirement age, but each of these solutions is politically sensitive, and doing something will be unavoidable.

And won't Trump's confrontational policy, which increases geopolitical tensions, undermine the dollar’s position, making it difficult to finance the budget deficit?

I don't think so. Currently, there isn't much of an alternative to the dollar. The USA is still viewed as a safe place to invest money. This perception hasn’t changed during the 2008–2009 financial crisis or during the pandemic.

An important point in Trump's programme is the reduction of taxes for businesses. Is this something that could stimulate the US economy? Are firms in the USA overtaxed?

I don't expect business taxes to be significantly reduced compared to today. Already, in 2017, during Donald Trump’s first term, there was a major reform that reduced taxes for the wealthiest and for businesses. However, it was a temporary measure, and important elements are set to expire next year. I believe Donald Trump will want to extend that tax cut. It is not guaranteed that this will fully succeed. Tax changes are enacted by Congress. If they don't have 60% support in the Senate, they must be balanced, meaning they cannot result in a drop in budget revenues. And Republicans don’t have such a majority in the Senate.

Won’t tariff hikes balance the tax cuts?

I don’t think the revenue from these higher tariffs will be significant. First of all, it's hard to imagine that Trump would be able to raise them as he promises, i.e., to 60% on goods from China and 20% on products from other countries. The latter seems particularly unlikely to me.

That would mean a radical increase in tariffs on goods from Canada or Mexico, where American automotive companies and many others produce a lot - not just final products but also components that cross the border multiple times in the supply chain. Therefore, I think the tariff increases will be selective.

An additional complication is that unless Congress enacts tariff increases, they cannot be considered a source of financing tax cuts for procedural reasons, which are practically significant in Congress.

Another of Trump's campaign promises is deregulation. Elon Musk is supposed to assist the president-elect with this. Is the American economy overregulated? Is this something that hampers its growth?

Deregulation is unfortunately a very vague slogan. Republicans will certainly differ from Democrats on antitrust and environmental policies. It's hard to say what impact this will have on the economy. Loosening environmental regulations, which somewhat restrain the mining and construction industries, may be beneficial in the short term, but is likely to have the opposite effect in the long term. The area with potential for deregulation is regulations regarding land use and infrastructure investments. In the USA, it is difficult to build a new road, railway, or bridge. National, state, and local regulations overlap, often paralysing such investments with lawsuits. There is also room to relax regulations regarding the construction of houses. However, it isn’t obvious that Republicans will target these actually harmful regulations.

Europe is certainly overregulated. This is one of the conclusions from the famous report by Mario Draghi, which diagnosed the causes of the declining competitiveness of the Old Continent. What, in your opinion, is the reason for the US economy performing better than the euro area economy in recent years?

There is no doubt that the USA is presently a more dynamic economy than Europe. This is partly due to a more flexible labour market. During the COVID-19 pandemic, there were significant structural changes in economies. In the USA, where it is easier to hire and fire people, the flow of workers from inefficient firms to more productive ones happens quickly, whereas in Europe, it is slower. This, in my view, is the main reason for the different trajectories of these economies.

There are other important, but in my view, less significant, factors as well. In the United States, the fiscal stimulus during the pandemic was larger than in Europe, allowing for a quicker rebound in economic activity (but also contributing to high inflation). The energy crisis related to the war in Ukraine was a burden for Europe but wasn't as acutely felt in the USA.

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Wojciech Kopczuk is a Professor of Economics at Columbia University in New York. He has been working at this prestigious institution since 2003. Concurrently, he is a researcher at the American National Bureau of Economic Research (NBER) and the European Centre for Economic Policy Research (CEPR).