The Trump Campaign Tried to Make a Serious Economic Argument. It Is a Very, Very Stupid Rabbit Hole.

Dream on.

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On Monday, two of Donald Trump’s better-known advisers delivered what may well be the most detailed description and defense of the candidate’s economic vision yet. Written by University of California–Irvine economist Peter Navarro and private equity baron Wilbur Ross, it attempts to quantify how the Republican nominee’s combination of mass corporate deregulation, tax cuts, and fossil fuels promotion will bring about a renaissance of American growth (while making said tax cuts more affordable). Navarro calls it the “whole chessboard.”

I’d say it’s more like checkers, but, I mean, Jesus—not even. Maybe Monopoly Jr.? The document that Navarro and Ross have produced is a dog’s breakfast of factual errors, conceptual nonsense, and regurgitated industry flimflam. It’s mostly a reminder that while Donald Trump is obviously not a public policy savant, neither are his public policy advisers, which is just one small reason among many why handing this man the presidency will probably end in tears.

Here’s a little background to whet your appetite: Earlier this month, Donald Trump released a tax plan that, even according to the extremely generous model used by the conservative Tax Foundation that assumes lower rates will bring about faster economic growth, would have still blown a multitrillion-dollar hole in the federal budget. Navarro and Ross argue that it’s a mistake to look at Trump’s tax proposal in isolation, however. Once you consider all the various ways he’s hoping to supercharge the economy (and cut some government spending), they become affordable.

The first thing I noticed that’s wrong with the report was a simple factual error, which may seem a little nitpicky but gives you a sense of how slapdash the whole effort is and should remind you that even Trump’s best and brightest tend to have an understanding of reality that’s unmoored from data or evidence. Early on, in a section on how the U.S. has suffered from its imbalanced trade relationship with China since the country joined the World Trade Organization, it states the following:

Justin Pierce of the Federal Reserve Board of Governors staff and Yale School of Management’s Peter Schott attribute most of the decline in US manufacturing jobs from 2001 to 2007 to the China deal.

I’ve read Pierce and Schott’s paper. I’ve talked to them about it. And it says no such thing. (I even emailed Schott on Monday to make sure I hadn’t forgotten something important. I hadn’t.) The study does offer strong evidence that China’s entry into the WTO eliminated many U.S. manufacturing jobs, but for methodological reasons, it can’t quantify the overall impact. This might seem like a small point. Except Navarro is a decently well-regarded economist who has devoted a growing fraction of his time to angry polemics about China and trade, and you’d expect him to know what this paper—which has been around in some form or another for several years—actually says.1 Instead, he (and thus, Trump’s brain trust) appears to believe, without any apparent evidence, that China may be responsible for the majority of America’s industrial employment decline.

But, you know, whatever. That’s just a small error in a literature review. It may or may not speak to a deeper narrative flaw in how Navarro and Ross understand global trade’s role in recent economic history. What about Trump’s actual plans?

Well, a big part of the candidate’s agenda involves freeing up oil, gas, and coal companies to drill and mine all the hydrocarbons they can lay their machinery on without being burdened by environmental protections. Here’s Navarro and Ross’ take on what that would do for economic growth.

For modeling purposes, it is difficult to forecast the effect that increased supply will have on prices. However, the Institute for Energy Research (IER) has estimated that America’s GDP will increase by $127 billion annually for the first seven years and by $450 billion annually for the subsequent 30 years as a result of the expansion of our energy sector

[Record screeches to a halt]

The Institute for Energy Research is a think tank dedicated to fighting climate change “alarmism” that has been funded by both ExxonMobil and a Koch brothers–affiliated foundation. Last year, an oil industry lobbyist joined it as a “distinguished senior fellow.” When Thomas Kinnaman, a Bucknell University professor who researches the economics of natural gas drilling, reviewed the group’s report for CNBC, he said the research “would never see the light of day in an academic journal” and that its methods were “rarely employed any more by economists.” The “study” also based its assumption on a world of $101-per-barrel oil, more than double the current price (maybe we’ll get there, but opening up vast new supplies certainly won’t help the industry do it). More sober minds might think twice about taking the IER’s math at face value. Navarro and Ross’ entire energy policy analysis hinges on it.

Laughable as that may be, however, their section on regulation may be even worse. Early on, the report states that the “Heritage Foundation and National Association of Manufacturers (NAM) have estimated regulatory costs to be in the range of $2 trillion annually—about 10% of our GDP.” Every part of this is misleading, starting with the citations. Heritage doesn’t seem to have done any actual estimating; instead, the conservative think tank references research by Mark and Nicole Crain, who also happened to write that report for the lobbyists at NAM. Their work has been utterly discredited on this subject. The Congressional Research Service has panned it. So has the labor-affiliated Economic Policy Institute, whose findings Trump and his handlers (including Navarro and Ross) love to cite. What did they botch so terribly? The Crains looked at the relationship between economic growth in developed countries and an “index of regulatory quality” created by the World Bank. But one of the index’s architects later explained that duo had badly misunderstood and misused the World Bank’s data, which, among other things, show that Denmark and Sweden—not exactly paragons of laissez-faire economics—have better regulatory environments than the United States. The CRS also reran the pair’s regressions, and found that tiny methodological changes made the relationship between regulation and growth disappear, suggesting their findings were probably not super sturdy.

That’s the report’s flimsy starting point. From there, Ross and Navarro proceed:

Donald Trump’s strategy will trim a minimum of $200 billion from America’s annual regulatory burden. This is roughly onetenth of the $2 trillion consensus estimate of that burden.

This reduction in regulatory drag would add $200 billion of pre-tax profit to businesses annually. Taxing that additional profit at Trump’s 15% rate would yield $30 billion more in annual taxes. This would leave businesses with an additional $170 billion of post-tax earnings.

In short, Donald Trump will in some way or another trim 10 percent off an imaginary figure, ushering in a flood of prosperity and tax revenue. We are diving deep down a very, very stupid rabbit hole.

And that brings us to trade, the core economic rationale of the puffy, persimmon demagogue’s campaign. The thing about Trump is that he usually rants about America’s rotten trade deals without explaining what, exactly, is so wrong with them. This report tries to correct for that, largely by spending about two pages arguing that the World Trade Organization’s treatment of value added taxes “is a poster child of poorly negotiated U.S. trade deals.” A value added tax, or VAT, is a national consumption tax that, unlike a regular old sales tax, is collected at different steps along the industrial supply chain. They often range between 15 percent and 25 percent, and last I checked, 160 countries have one. The U.S. is basically the only major nation that doesn’t.

Navarro and Ross are upset about an issue called “border adjustability.” Here’s how it works: When a company in Germany makes goods to sell at home, it has to pay the VAT. But if it makes them to sell in the United States, it doesn’t—the tax gets waived at the border (since, again, it’s only supposed to be a domestic consumption). Meanwhile, if an American company makes widgets to sell in Germany, it does have to pay the VAT.

In short, everybody has to pay Germany’s VAT when they’re selling goods in Germany. Nobody has to pay Germany’s VAT when they’re selling goods outside of Germany. Makes sense, right?

It’s all perfectly legal under WTO rules. However, Navarro and Ross say border adjustability turns the VAT into an “implicit export subsidy” for foreign companies and an “implicit tariff” on U.S. exporters. “The practical effect of the WTO’s unequal treatment of America’s income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions.”

This is just … wrong. Dead wrong. It’s true that American car companies, to take just one example, have to pay a German VAT when they sell sedans to Berlin or Düsseldorf. But you know who also has to pay that tax? BMW and Volkswagen. Border adjustability just puts everybody on equal footing. Waiving the VAT on exports does the same thing. If German companies had to pay the VAT on cars they were sending to the U.S., they’d be at a huge disadvantage compared to their American rivals, who wouldn’t face a domestic VAT. Germany would essentially be suppressing its own exports.

Insofar as Ross and Navarro have a point here, it’s that the United States suffers because, under WTO rules, it isn’t allowed to waive its corporate income tax rate on exports. (Why not? I’ve been told allowing it would be a logistical nightmare.) And, on paper at least, the U.S. corporate income tax is extremely high. So, theoretically at least, that might drive up the cost of U.S. goods abroad, if companies were forced to pass on the cost of the tax to consumers. (They don’t make that argument directly, mind you, but it sort of seems like they might be hinting at it.) The problem with that line of argument is threefold. (At least!) First, nobody actually thinks that companies pass on the corporate tax to shoppers. Instead, shareholders and workers eat it in the form of lower earnings and wages. Second, because our tax code is shot through with holes and companies are good at stashing money abroad, corporations don’t typically pay the full statutory rate on their profits. Finally, Trump wants to slash the U.S. rate so low anyway that none of this would really matter. It wouldn’t actually be a trade issue.

But maybe I’m losing the forest for the trees here. The VAT stuff is bad, but kind of small-bore. Later on, the two authors try to calculate what closing America’s trade deficit would do to the economy without taking into account what collapsing imports might do to consumer prices. They also vaguely imply that we can somehow bribe South Korea and China into better trade deals by offering them oil and gas, even though the United States does not in fact have a national oil or gas company. It gets wacky.

This is all to say that even when it comes to his signature issue, Trump’s wonks seemingly have no idea what they’re complaining about. Nobody on this campaign has any idea what they are talking about. And there is a roughly even-money chance they’ll soon be running the country. Anybody want a drink?

1It’s possible Navarro was confusing Pierce and Schott’s work with another well-known study that suggested trade with China eliminated roughly 1 million manufacturing jobs between 1999 and 2011. But even that number—which is awful enough—would be far less than half the total losses.