Trump and the Rs Have No Policy Chops, And It's Showing

All they know how to do is high-end tax cuts. That's a big opening for those of us trying to craft useful policies.

Yesterday, I published a piece at msnbc.com wherein I argued three reasons why Trump and the Rs will face a tough challenge trying to solve the affordability crisis. You can get the details at the link but reasons one and two, briefly, are:

—Trump overestimates the power of his alt-reality show. As long as he’s been in politics, he’s operated on the principle that if you can connect as deeply with your followers as he routinely does, they will believe what you tell them. In that world, tariffs don’t raise prices. Tax cuts lower the deficit. Crime is up. Immigrants eat your pets. But this Trumpian superpower demonstrably fails when it comes to affordability. As far as prices are concerned, consumers know which way is up.

—The man carries a religious fervor for tariffs. Unless you’re paid to think otherwise, most everyone knows that tariffs are a tax on imports, a portion of which is passed through to consumers. Furthermore, tariffs fall harder on those with lower incomes, as imports tend to constitute a larger share of their spending. As an economist who has advised presidents, I am hard-pressed to think of a more ill-advised policy for an affordability crisis than tariffs.

But it’s reason three I want to drill down on today:

The president’s third problem is that the affordability crisis calls for something that he and the Republicans simply do not do anymore: objectively diagnose a problem and design policies to address it. Attacking the affordability crisis requires carefully designed policies to address market insufficiencies that have festered for decades. The child care market is wholly insufficient to parents’ needs. We suffer an affordable housing shortfall of at least 2 million units. The Affordable Care Act has widely expanded coverage and slowed the growth of health care costs, but large, structural problems and cost inefficiencies persist in our health care system.

Progressive thinkers are actively pursuing policy solutions to meet these challenges. The Democratic winners on Tuesday night all had platforms built from planks of this work. I was struck, for example, by how New York City Mayor-elect Zohran Mamdani from the left and New Jersey Gov.-elect Mikie Sherrill from the center both ran on price controls (he on rents, she on electricity).

But much of this policy work is just beginning, and that fact puts Trump and the Republicans at a huge disadvantage. Yes, Democrats have a steep pile of their own issues, but they still do policy work, while Republicans focus entirely on stirring up partisan rage and legislating tax cuts favoring the rich.

Wait up, you might say, if you’ve been tracking some recent media on this. Hasn’t the Trump admin elevated three new affordability policies in recent days?

Nah. With zero thought, analysis, or even the simplest, most basic math, they’ve offered up three bad ideas, none of which help with affordability, with the very partial exception of the 50-year mortgage, though, as you’ll see, that depends on how much of a premium above the traditional 30-year rate lenders charge borrowers. Far from contradicting my point, these proposals underscore it.

In a bid for greater housing affordability, apparently, FHFA director Pulte showed Trump a flattering poster wherein he (Trump) is touting this longer-term home loan, and ten minutes later, Trump was blathering about it on the socials.

But a moment’s thought lays bare the flaw in this ointment: while it is true, and helpful to those struggling to afford a home, that the monthly payment might be lower if you stretch out the loan, it very significantly slows the building up of home equity. I ran the numbers for the median home (see ftnt for details¹), and while the monthly payment is $107 less, over the course of the 50-year loan, you’ll spend over $400,000 more on interest than for the 30-year loan. That’s 2x more interest, and thereby much slower home-wealth accumulation.

Of course, many sell well before they’ve paid off their mortgage, but again, the point is that if you do so, you’ll have far less home equity than with the standard 30-yr FRM. There are other technical problems too, the type you have to wrestle with when you engage in serious policy work. EG, as housing finance expert Jim Parrott pointed out to me, Fannie and Freddie are not allowed to purchase these mortgages from lenders (under Dodd-Frank, they’re not “qualified mortgages”) which likely means a higher mortgage rate and worse outcomes relative to the 30-yr rate. If the 50-yr rate is 1 ppt above the 30-yr (instead of the 0.5 ppt I assumed), the monthly savings falls to $19/month and the interest-payment differential is much larger.

Next, Trump floated the idea of giving everybody, or some subset of everybody, a $2,000 check, paid for out of tariff revenue, to offset the cost of the tariffs and boost affordability.

I’m not even sure where to start with this one. First, I thought that in his world, tariffs didn’t raise costs. Also, if you spend those revs, which are substantial, then our fiscal outlook looks even less sustainable.

If he’d consulted with his CEA, someone over there would have pointed out that the affordability crisis is driven by inadequate supply, not too little demand. Under those conditions, stimulus checks are more likely to accelerate price growth. Now you’re “fighting the Fed,” who would be very likely to raise interest rates if the admin engaged in this level of fiscal stimulus.

What level is that? Here’s what the CRFB had to say about that, along with a telling graphic:

Assuming these dividends are designed like the COVID-era Economic Impact Payments, which went to both adults and children, we estimate each round of payments would cost about $600 billion. In comparison, President Trump’s new tariffs currently in effect have raised approximately $100 billion thus far and – including those tariffs that have been ruled illegal pending a Supreme Court appeal – are projected to raise about $300 billion per year.

In other words, literally five minutes with a spreadsheet would have revealed that there aren’t nearly enough tariff revenues to pay for these checks, especially if Trump loses his tariff case currently before SCOTUS (though I’ve predicted he’ll just replace the IEEPA tariffs with allowable ones).

If you want to give consumers a break from tariff-induced higher costs, wouldn’t it be much easier to just end the tariffs??

Finally, there’s Health Savings Accounts. There’s nothing new about this one but when Trump, during the shutdown debate over the ACA premium tax credits, started talking about just giving people money to buy coverage, Rs quickly went to HSAs. That’s because they’re another tax shelter for the wealthy disguised as health insurance.

HSAs are tax-favored savings accounts² which you can open if you enroll in a high-deductible health plan. Right outta the box, once again, a few major flaws are obvious. First, if you’re a low-income household, you’re not going to be able to save much. Here’s a figure by CBPP comparing who contributes HSAs versus who benefits from the ACA premium tax credits which are about to expire, leading to the doubling of coverage costs.

Since contributions to HSAs are fully tax deductible, the magnitude of their tax benefits goes up with the federal income tax rate, which goes up with income. In other words, as the above figure makes clear, they’re highly regressive, especially compared to the ACA credits. That’s why 4% of HSA benefits go to families with incomes below $50,000 while 77% goes to families with incomes above $100,000.

Next, CAP reports that “some evidence has shown that enrollment in HDHPs—a requirement for HSA participation—is associated with lower use of necessary care and greater out-of-pocket cost burdens. This is especially concerning for lower-income families and some people of color who face greater cost-related access disparities to begin with.”

CBPP agrees:

Research found no evidence that people switching into high-deductible health plans, which are required for HSA contributions, learn to shop for lower prices. And multiple studies found that HSAs do not reduce health care spending at all, instead just shielding more of that spending from taxes.

As readers know, I view the Ds actions during the shutdown as usefully elevating these health cost issues, and as I noted in the msnbc piece, even with the ACA in place, cost inefficiencies abound, whether it’s drugs, hospital costs, or medical care (especially specialty care). We spend 1.6x more on healthcare as a share of GDP than other advanced economies (about 18% here vs. 11% there) without better results, and with a system that almost everyone, myself included, dreads interacting with.

In other words, the affordability solution here must involve lowering costs, not incenting sick people to avoid coverage, as is the case with HSA/high-deductible plans. But that requires good, old-fashioned, roll-up-your-sleeves policy work and now, post-shutdown over these very issues, is the right time for those of us willing to do that work to get to work on them. Calling all health care economists!!

As noted, the one thing Rs policy muscle memory hasn’t forgotten is tax cuts favoring the wealthy, and HSAs are a nothing more than policy jujitsu to try to disguise a tax shelter as health coverage. But that’s all they’re good at, and this gives the Ds, with their think-tank infrastructure and academics who still believe in analysis, a distinct advantage.

It’s a good time to press that advantage, not because I’m so naive that I think voters will read our policy memos and vote accordingly based on our clever designs. But because as the Rs continue to flail and fail, especially re affordability, they will be sent packing by the same anti-incumbency we saw last Tuesday and in most recent elections.

At that point, their replacements will need good, knowledgeably-crafted policies to meet the challenges that are currently being ignored or made worse by ideas like the three reviewed herein. It’s probably the only way to break the lurching electoral cycle but more importantly, to help Americans meet the economic challenges they face.

1. I simulated the difference using the median home price of about $410K, 20% down payment, 6.3% rate for the 30-yr FRM and 6.8 % for the 50-yr FRM.

2. HSA contributions are untaxed and can be invested in securities. The savings can be used, with no tax penalty, if they are applied to qualified medical expenses.