With the new administration settling into office, President Trump's economic team faces a set of formidable domestic challenges. Rising federal debt, inflationary pressures, tax policy, financial regulations, and labor market issues will dominate the policy landscape in the coming months. Scholars from the Hoover Institution have analyzed these pressing issues, providing key insights into the choices facing the administration.
US Economic Challenges
To chart a path forward for the US economy as it contends with long-standing challenges such as the federal debt and emerging ones such as the rise of AI, the Hoover Prosperity Program gathered leading economists and other scholars from a wide range of disciplines for a one-day, solutions-oriented conference on January 21.
Sessions throughout the day covered debates over income inequality; whether the current trajectory of fiscal policy is sustainable; how the US economy should adapt to the AI boom; and current challenges to economic prosperity.
Read more and watch the conference sessions here.
Tax Policy and Federal Debt
With the impending expiration of the individual provisions in the Tax Cuts and Jobs Act of 2017 (TCJA), tax reform will loom large in the 2025 congressional debates.
At The Grumpy Economist, Senior Fellow John Cochrane provides an overview of the administration’s tax proposals. Cochrane notes that the proposals reflect President Trump’s efforts to deliver on his campaign promises. While substantive tax reform is needed, the initial tax proposals have different objectives:
At some point the US needs a deep tax and spending reform, to raise revenue while broadening the base, improving incentives for economic growth, and solving the long term budget problem. This isn’t it. This isn’t supposed to be it.
At Liberty Lens, Hoover scholars Joshua D. Rauh and Daniel Heil consider what a pro-growth tax reform would look like given the nation’s fiscal realities. They argue for permanently extending growth-inducing tax provisions in the TCJA such as bonus depreciation and rate reductions. Other provisions of the 2017 tax law, such as the expanded standard deduction and enhanced child tax credits, merit only temporary extensions. Ultimately, Rauh and Heil argue that substantive spending restraint is needed; otherwise, “tax cuts that are labeled permanent will prove not to be, as future taxpayers will have to bear the burden of deferred obligations either through higher explicit taxes or monetization of obligations through inflation.”
Financial Regulations
The new administration appears eager to rewrite the nation’s banking rules. Senior Fellow Ross Levine warns in this op-ed at Barrons, “Trump Wants to Unleash the Banks. End the Bailout Culture First,” that before pursuing aggressive bank deregulation, it is essential to address policies that encourage excessive risk-taking.
What’s needed is a credible strategy to ensure that decision makers within financial institutions have genuine “skin in the game.” This means reforming policies that shield influential investors and executives from the consequences of their actions, exposing them to potential losses. Such reforms would realign incentives, restoring the natural tension that constrains excessive risk-taking.
In an interview at Defining Ideas, Levine offers possible strategies to address "moral hazard" including increasing banks’ capital requirements to ensure investors have more at stake; forcing banks to borrow from large investors whereby the government would make a credible commitment not to provide bailouts; and "clawback" provisions that tie executive compensation to bank performance.
Senior Fellow Amit Seru echoes these findings in a recent Financial Times op-ed, “Wall Street Regulation Needs a Rethink under Donald Trump.” He notes that recent bank failures “reveal a system that is reactive rather than proactive.” Seru argues that the Trump administration should look to consolidate regulatory oversight of banks to reduce unnecessary duplication and improve coordination. More regulation is not the answer. Instead, “reform must emphasize accountability: banks should bear the consequences of their risks.”
Seru and Stijin Claessens, an economist affiliated with the Yale School of Management and the Centre for Economic Policy Research (CEPR), are authors of the 27th Geneva Report, which focused on the 2023 banking turmoil.
The report explains that despite much post-global-financial-crisis reform, large funding vulnerabilities emerged due to expansionary monetary policies, particularly in the United States.
Watch a discussion about the report copresented by Hoover's Financial Regulation Working Group and CEPR here.
Medicare Prescription Drug Price
The Inflation Reduction Act of 2022 (IRA) included new measures to control Medicare prescription drug prices. In a new paper for Hoover's Economic Policy Working Group, scholars John Cogan, Daniel Heil, and Casey Mulligan explore the potential unintended consequences of the IRA’s Medicare drug price negotiation program.
Their research examines how the IRA created an incentive for drug makers to raise the launch prices of new drugs, undermining the promised savings of the IRA. After accounting for these price increases, they find that IRA’s cost to society from lost drug innovation “likely far outweigh any benefits from the policy.”
Immigration
In a recent episode of Economics Applied, Hoover scholars David Figlio, Paola Sapienza, and Steven Davis explore how the presence of immigrant students in classrooms influences the educational outcomes of US-born children. Drawing on comprehensive data from Florida public schools, Sapienza and Figlio’s research finds “that the presence of immigrant students has a positive effect on the academic achievement of US-born students, especially for students from disadvantaged backgrounds.”
In a recent interview at Defining Ideas, Sapienza speaks about her work leading the new J-P Conte Initiative on Immigration, which works to study the positive impacts of migration to the United States. She discusses what recent scholarship has shown about migration “lifting all boats,” by increasing US productivity, average wages, and innovation. And she also touches on how the current discourse about immigration largely ignores the valuable flow of skilled workers to the United States.
Featured Hoover Research Team: The Hoover Prosperity Program
The Hoover Prosperity Program provides cutting-edge research on the economic policies that promote long-term prosperity. The program seeks to “advance the state of knowledge so that citizens and public officials can make informed decisions about a core question: what set of laws, policies, and regulations is most likely to insure a prosperous future?”
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