Unsolicited Advice

The Trump economic team is assembling and making plans. What advice might I give them? As I wait by the phone, here are a few thoughts.

The current agenda seems straightforward but limited: Extend the tax cuts, deport some immigrants, tariffs, some industrial policy.

My advice: Think much bigger. Yes, these will be a first year agenda, but also use that time to lay the ground work for transformational changes. What will be Trump’s legacy? Focus on changing how things get done, not just the policy answers which can get overturned. In many cases, just letting the weeds grow will work better than trying to reform dinosaurs.

We are at an inflection point. The progressive left is discredited. Voters consider the “elites” running the country for the last few decades to be completely incompetent. We look around and our public life looks like a hoarder’s house. A counter-revolutionary wave is sweeping the globe, from Javier Milei to Giorgia Meloni to Pierre Poilievre. This is potentially bigger than the Reagan-Thatcher revolution. But just where this wave will lead is still an open question. You can set that agenda.

Don’t underestimate Trump. Yes, he’s a “disrupter.” He will say and do things outside the tired constraints of the traditional small swings between parties. He will talk about buying Greenland!

Here’s an agenda. (Mostly, “read the last 10 years of Grumpy Economist,” but I distill.) In big philosophical terms, this is the “growth” “abundance” “efficiency” and “freedom” agenda. That contrasts with some on the right who long for a more protected life, and are willing to accept the stagnation that protected economies suffer, as evident in Europe and Latin America.

But you don’t have to get in a fight. There are so many opportunities in the Trump agenda, that if you spend your time on the bold growth-oriented innovations rather than fighting too much about tariffs, you will get much further.

Taxes

The current income tax system is an abomination. Burn it and start over.

The tax code has three functions: Raise revenue for the government, redistribute income, and subsidize this and that. Start by separating the functions.

Revenue

To raise revenue for the government with minimal economic cost, the unequivocal answer is to eliminate the personal and corporate income tax, estate tax, all taxes on rates of return (interest, dividends capital gains) and replace them with a consumption tax. The same rate for all goods: don’t transfer income by mucking with prices. No deductions, no exclusions, not even mortgage interest and charitable deductions. Lower the rate, broaden the base. I prefer a VAT for various reasons, but the mechanism doesn’t matter so much. The “fair tax” was already introduced into Congress. Detailed consumption-tax proposals have been around since the 1970s. This could happen.

Redistribution

What about progressivity — the idea that better off people should pay not only a larger amount but a larger percentage? Well, now you’re redistributing income, which is a different question. We need to stop looking at taxes in isolation and examine the progressivity of the whole system, including tax and spending. A flat tax that finances big transfers can be more progressive than a graduated income tax.

One can continue to mix taxes and redistribution, with a progressive consumption tax or even a progressive VAT. But why pervert taxes to do the work of redistribution? If you want to redistribute, send people checks. On budget, annually appropriated, not perpetual entitlements. See social programs below. As in much else, focus first on getting the structure for making the decision, not the final outcome.

Subsidies

Opportunity zones, low income housing tax credits, energy efficiency tax credits, renewable energy tax credits, electric vehicle tax credits, and on and on. “tax credits, deductions, exclusions, exemptions, deferrals, and preferential tax rates. .. operate like mandatory spending programs (such as Medicare),” and “Are Comparable in Size to Federal Discretionary Spending.” (GAO)

Much of this is automatically eliminated with the corporate income tax. If you want to do this, send people checks. On budget, annually appropriated. Send checks where voters can see them.

Social programs

We have hundreds of means-tested social programs, plus redistribution through the tax code. This needs to coalesce into one sensible system. Programs interact, so even if each program is well designed to take away only, say, 30 cents of benefits for each dollar earned, once you participate in several it’s easy to lose a dollar of benefits for each dollar you earn, and more. There are cliffs where one extra dollar loses health insurance or housing.

Put them in one place, and make sure nobody faces more than a 50% marginal tax rate. Drastically simplifying would help. Why do we have over a hundred separate means-tested housing, food, energy, transportation, health, and income subsidies?

If we got the incentives right, a lot of the cost would evaporate.

Social security fixes are well known. Index to prices not wages. Work longer. It will inevitably become a transfer program not a savings program.

Health

Health care and insurance is a drastically overpriced mess. Quality can be good, but the expense is horrific. This is NASA, not SpaceX. Look at your latest bill.

Bring back the market. There is no reason health care and insurance can’t be provided by a competitive deregulated market. Help poor people with a voucher. If the government wants to pay for people’s insurance, that does not mean that the government must run its own insurance company. Or offer a bare-bones public system, if you wish. But your, my, and typical working American’s health care does not need to be so government managed in order to help poor people. We don’t have a government takeover of housing to provide homeless shelters. (Well, except in California, but that’s another story.)

Basics: Get rid of the tax deduction for employer provided group insurance, or at least apply it to personal portable plans. (Once we get rid of income tax, that will be easier. These things interact.) Bring back the cash market so that it’s possible to just pay for care. The cash price should be the low price! Maybe we need a law that providers must offer a cash price equal to or lower than any negotiated price including Medicare. (It would be, except mandated cross-subsidies.) Eliminate cross-subsidies and allow competition. (Much more, including all your objections.)

We don’t really need to get rid of Obamacare in its entirety. Just get rid of a few of its prohibitions that do not allow an innovative competitive system to emerge and outcompete Obamacare, for example by allowing portable individual guaranteed renewable policies that are now illegal.

FDA should certify drugs, but not make it illegal to buy unless certified — or required for insurance to cover it if certified. Medical school supply constriction, state licensing, more immigrant health workers…

Regulation in general

The DOGE is a great initiative, and I look forward to seeing what they do when faced with the regulatory morass.

The problem is not so much the number of regulations, it’s what those regulations do. Were need smart regulation, not just less regulation.

Fix the structure of regulation. Each regulation should face a mandatory review, every 5 or 10 years. It needs to go through retrospective cost benefit and public comment. It needs to regularly prove it works as intended. We need shot clocks: regulatory review can’t take more than a year, legal challenges end in a year. Congressional review to block regulations should be open ended.

Sheathe the lawfare. Yes, the Biden administration outrageously politicized regulations, among other sins threatening an alphabet soup avalanche on Facebook and twitter in order to strong-arm them to censorship. You see the CEOs fawning now, to avoid similar treatment and procure regulatory benevolence. It will be enormously tempting to wield this sword. Instead, work to make it impossible for the next democratic administration to do the same. In part, permanently reducing regulators’ powers will stop their political deployment.

Obviously regulating AI, the biggest and most promising technical innovation of the moment, before we have any idea what it can do, would be a terrible growth-killing idea. Don’t follow Europe down that path.

Energy

Throw it all out. Mileage standards, efficiency standards, washing machines that don’t wash. Throw out EV solar and windmill subsidies that do not reduce a thimbleful of carbon (if you subsidize alternatives, that just frees up gas for someone else to burn). End the war on fossil fuel, train subsidies, all of it. How have we had mileage standards since the 1970s and the Ford F150 is the most popular car in the US? (Answer: Separate standards by weight class, undoing the whole point.)

That will follow if we apply the above: look at each regulation and see honestly if it has achieved anything useful.

Bring back nuclear. Fund the Nuclear Regulatory Commission by how many reactors it approves.

Banks and Finance

The Dodd-Frank Reforms failed. See SVB, an elephant in the room which the regulators did not see. And now they want to regulate “climate risks.” Big banks are still too big to fail and count on bailouts. The Fed refused to let corporate bond prices fall in the last hiccup.

Enough. We know the answer: with equity-financed banking and narrow deposits, we need never have a private sector financial crisis again.

You don’t have to try to reform the dinosaurs, who scream about having to put one dollar in for every 10 they borrow. Just let the mice grow. If you run a financial institution in which short term debt is less than, say, 25% of the market value of equity and long-term debt, do what you want. (Like SpaceX. Why do we need an army of regulators looking at safe bond portfolios, and none looking at rockets to Mars? Because Spacex is funded by equity.) If you take deposits and process payments, back them with reserves or very short term treasurys, and do what you want. (More here, with answers to your objections.) The Fed should stop its war on narrow banks, and given them medals instead.

Oh, yeah, fix treasury debt. The treasury, not the Fed, should supply reserves to all. And eliminate the CFPB.

While we’re at it, eliminate a slew of alphabet soup agencies. The FTC antitrust has long outlived any usefulness in producing more competition and now is just a political tollbooth. The SEC needs to be radically scaled back. They really have no idea how their rules affect markets. The overlapping alphabet soup of financial regulators accomplish essentially nothing. (I didn’t go on enough in this post about agencies and departments that need to simply shut down. Next time.)

Immigration

With a falling birthrate and bankrupt social programs we need immigrants. We need economic immigrants, that will come, work, start businesses, raise families, pay taxes. Are medical costs too high? Let in more nurses. (For example.) Jobs? Each immigrant increases demand too, providing work for Americans.

The immigration system is dysfunctional, with an emphasis on asylum, family reunification and so on. It’s practically designed to let in people who will cost a lot, and not assimilate. Legal economic immigration is very difficult. If you want to come to the US, work, pay taxes, raise a family, and vote Republican, the wait is literally hundreds of years from many countries.

President Trump has expressed some good ideas: raise H1B visas, staple a green card to each STEM degree, welcome Canadians. But think outside the boxes. Bureaucrats are poorly positioned to decide who is high productivity and who is not.

Focus on the rules not the numbers. As a tariff is always better than a quota, a rule is better than a number. The easiest answer is just to charge for it. Pay $10,000, speak English, pass the citizenship test, show you have means of support, no social programs or other support for 5 years, welcome to the US. At least allocate visas by earnings (and hence tax payments) not by lottery.

Immigration needs assimilation. That’s Europe’s big failing. (An essay on immigration.)

Little things

Labor law reform. It’s hard to hire people. It’s hard to fire people. A thicket of laws and regulations stand in the way. (Did you know there is a federal rule on how employees share tips?) We are now the Republic of HR. Try hiring a nanny legally.

Education: Vouchers, Charters.

Repeal the Jones act. Maybe when the US fleet is down to one ship we can jettison this anachronism.

Insane construction costs and delays. $2 billion per mile subways. 10 years permitting process. Davis Bacon and contracting restrictions that drive up construction costs. NEPA review. Make America Build Things Again. Cost bloat is our #1 national disease.

Housing. We insanely subsidize housing, and regulate it at the same time. Axe Fannie and Freddy. Axe “affordable” housing schemes. Eliminate the mortgage interest deduction. (Another benefit of eliminating the income tax, it goes away on its own.) Eliminate rent controls. The first thing a consumer financial protection bureau should do is to nudge people out of a fantastically over-leveraged low-return high idiosyncratic risk investment — the owner occupied home. Buy stocks to build wealth. Drastically reduce historic preservation. Our cities are not museums. Let Them Build. Restore property rights.

End the Ex-Im bank. I just picked one of our many crony-capitalist subsidies.

Transportation. With a few exceptions, train bad, bus good. Well, train lovely, nostalgic, but ridiculously expensive, stuck where the tracks go, low passengers per hour, inflexible. Eliminate the preference for rail in Federal transportation programs. No federal money for transit systems that don’t collect fares. Allow private buses. Public transit needs to be fast and safe. Overturn Biden orders that infrastructure money can’t go to new roads or lanes.

Law

We have way underinvested in our legal system. And it’s pretty cheap, on the scale of $100 billion ratholes like student loan forgiveness, chips and energy subsidies, and so on.

Crime clearance rates are shockingly low. If almost everyone who committed a crime got caught, we would have a lot less crime with much less severe (and expensive) punishment. On the other side, criminal suspects sit for years, and the vast majority are denied real trials. If immigrants have the right to a hearing, it shouldn’t take years. There are only 1457 federal judges.

Restore our economic freedoms, including the right to transact. No more de-banking.

Sheathe the lawfare. What they did to you, and your associates, is an outrage. It will be so tempting to wield this sword in revenge as well. (Prediction: Democrats will soon be swooning over the sanctity of the Supreme Court’s affirmations of executive immunity, as applied to Biden.) The perversion of the legal and intelligence systems to partisan must end. Expose what happened, yes, as a campaign to make sure it doesn’t happen again.

Federalist society: It’s time to rethink Wickard v. Filburn! If I grow wheat in my own back yard to make bread to feed my own family, how in the world is that the business of the Federal Government?

Epilogue

Well, we can go on and on. I seem to have drifted from advice for the Trump Economic team into a Libertarian Fantasyland, so I doubt that phone is going to ring. But you never know… who would have thought Argentina would elect a Libertarian?