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Trump’s “populist” economic proposals come with massive catches. Here's what to watch for.

President-elect Trump’s recent "reversals" on campaign promises might appear to signal a more moderate policy agenda. He and members of his transition team have backed off of the pledge to deport millions of undocumented immigrants (focusing instead on the subgroup that has a criminal record); moved away on the promise to prosecute Hillary Clinton; and dropped the idea Mexico would pay for "the wall." And Trump recently expressed a willingness to leave intact key components of Obamacare, signaling his preference to amend the statute rather than repealing it.

But it would be a mistake to view these reversals as a sign that he’ll achieve a moderate or populist agenda. While some of Trump’s economic policy proposals and recent reversals are, in isolation, to be welcomed, many may contain poison pills. Trump’s other agenda items, such as massive tax cuts and financial deregulation, are hostile to the financial security of ordinary Americans that supported him. Which of these agendas will he succeed in passing?

Much will depend on the tug-of-war between the Trump administration and now-empowered Congressional Republicans. Appealing to populism may have been an effective campaign tool for Trump, but Republicans controlling Congress remain largely pro-corporate budget hawks, committed to reducing the size of government, cutting redistributive social programs and eliminating regulatory safeguards. Here are some of the key issues, and what to watch out for.

Infrastructure — a pork-flavored poison pill?

The US needs to rebuild its transportation infrastructure — meaning making smart investments in airports, ports, roads, new rail systems and waterways to free-up movement of workers and goods in our economy. Trump’s signature $500 billion infrastructure campaign proposal is more than double in today’s money what FDR spent on the Works Progress Administration, the Depression-era public works program that employed millions.

Trump’s main populist achievement ahead of 2020 could be passing a large infrastructure bill, allowing him to point to the jobs it may create. But it's unclear how Trump proposes to pay for his infrastructure plan. To appease budget hawks, his advisers have proposed using mainly tax credits to encourage private investment. And any government spending, they argue, would be paid back through taxes on the wages of new jobs and business profits created by the infrastructure projects.

One concern with this approach is that it restricts infrastructure to projects that generate user fees, like toll roads and toll bridges, or public utilities in higher income areas. The approach ignores the economic benefits of infrastructure that aren’t captured by investors. After all, a better road doesn’t just benefit the worker who can now commute to a better job (and is willing to pay a toll). In today’s economy, connecting high-skilled workers benefits a commuter's co-workers as well, through shared know-how and knowledge creation.

Any infrastructure bill will likely also include some direct government spending. This can be a good thing. After all, any sea port worth modernizing is an investment worth borrowing or taxing for. (To be sure, elected representatives, Republicans and Democrats alike, may prioritize projects that have political benefits — that are located in key swing districts, for example — over the most cost-effective, pro-growth projects.)

But here's the real poison pill: A now-empowered Republican Congress may insist that any dollar spent on infrastructure be offset by cuts in social programs. The Republicans’ wish list has long included slashing Medicaid and Children’s Health Insurance Program spending; cutting the Supplemental Nutrition Assistance Program (SNAP, the federal food stamp program); cutting the Earned-Income Tax Credit (EITC, the work-incentive and tax credit for low-income earners); and numerous other programs such as college Pell grants, college loan subsidies, and Social Security Disability Insurance, programs which they argue are inefficient, and disincentivize work effort.

If the commitment among Congressional Republicans to cutting social programs is aggressive now, it will be fiercer still in the face of expanded infrastructure spending.

This creates a tension between Trump’s populist promises and the demands of Congressional Republicans. That tension exists in Trump's overall agenda, too, in which proposals that advantage large corporations and the wealthy sit side by side with the populist plans. Trump himself, for instance, advocates slashing Medicaid spending by converting the program to state block grants — namely, fixed payments, regardless of how many people enroll in Medicaid over time, or how fast medical costs grow.

These programs aren’t just critical safety nets, but are also investments in the health and education of Americans. Research by economists David Brown, Amanda Kowalski, and Ithai Lurie shows that children with access to Medicaid eventually receive less in government EITC in the future, pay more taxes, and, for women, have higher cumulative wages.

This is on top of the direct benefits such programs provide to citizens’ health, lifespans, and educational attainment. Similarly, numerous studies show that programs such as food assistance and college grants to low-income students improve the education and skills of future workers, beyond the benefits they provide as part of the social safety net.

Americans seeking change in Washington must be vigilant that infrastructure spending be directed at the most economically beneficial projects, and that it not come at the cost of gutting social programs.

Trump proposes ending one tax loophole for the wealthy — then giving them the store

Nor should such programs be paid for by working-class Americans, while the taxes of the wealthiest are slashed — another live possibility.

Campaigning to shake-up the rigged economic system, Trump (and Secretary Hillary Clinton, too) proposed tax cuts for ordinary Americans, and for eliminating the "carried-interest tax loophole." The loophole allows ultra-wealthy managers of certain investment funds to treat earnings as a capital gain rather than income from services rendered (which it is).

Because capital gains are taxed at a much lower rate, the loophole allows some of the wealthiest Americans — just 2,000 or so — to pocket an additional $1.5 billion to $12 billion per year. (If the upper estimate is true, eliminating the loophole could pay for President Barack Obama’s universal pre-kindergarten education proposal, which would benefit millions of low-income children.) The carried interest loophole symbolizes a rigged economic system like no other.

However, Trump’s tax proposal is a wolf in populist sheep’s clothing. The new revenue that would come in as a result of eliminating the loophole — assuming Republicans go along with doing so, which is far from clear — would be a drop in the bucket compared to the massive tax cut he proposes, which wildly advantages the wealthy. The nonpartisan Tax Foundation projects proposed by Trump’s income and business tax cuts would create a $4.4 trillion to $5.9 trillion revenue shortfall over the first 10 years. The nonpartisan Tax Policy Center estimates the budget shortfall to be $9.5 trillion.

Under Trump’s plan, income earners in the top 0.1 percent would receive a $1.3 million tax break every year (representing 19 percent of their income). This large overall decrease in taxes includes the higher taxes from eliminating the carried interest loophole. Earners in the middle would receive roughly $2,700 per year (4 percent of income). Those at the bottom would see their taxes drop about $128 per year (just 1 percent).

How will these cuts be paid for? You will be shocked to hear this, but, yes, there will be pressure to offset the tax breaks by, again, cutting social services — Medicaid, CHIP, food stamps, EITC, and disability insurance. The Tax Policy Center projects that unless Trump’s tax plan "is accompanied by very large spending cuts, it could increase the national debt by nearly 80 percent of gross domestic product by 2036."

Fiscal responsibility calls for spending wisely. Populism calls for spending that benefits ordinary Americans over the interests of the economic and political elite. Both are sensible. But Trump’s highly regressive tax plan, plans to deregulate financial institutions, and the potentially large cuts to critical social programs required to pay for the tax cuts could wind up sacrificing both those goals on the altar of Ryanesque ideology.

Trump’s backpedaling on Obamacare seems promising — but only at first glance

Perhaps the most reassuring of Trump’s recent economic policy reversals — to mainstream economists, at least — was on Obamacare. He expressed a support of two key components of the health law: the popular prohibition against denying coverage due to preexisting conditions, and the provision extending the time adult children can remain on their parents’ health plan.

However, it’s what he didn’t say that raises two immediate issues. First, how much funding will be made available for premium support — the subsidies that make it possible for many people to afford private insurance plans. If the preexisting condition provision remains in place—as Trump has signaled — then health care consumers will continue to need premium support, even in a world without the Obamacare exchanges.

Why? If enrollees are guaranteed coverage, then the sick would enroll knowing they wouldn’t be turned down. Inevitably, insurers would have to raise premiums to cover the spending on the sick. This drives away healthier, less costly individuals, which further raises premiums, creating an unstable market with very high premiums and few people covered. The conventional way to prevent this kind of unstable feedback loop is to mandate that everyone purchase insurance — or, as in the Obamacare variant, to impose penalties for lack of coverage.

We don’t know yet where Trump and Congress will land on the questions of mandates (which many Republicans loathe) or premium support (ditto). If the carrot (the premium support) and stick (the mandate) are both small, then healthy and low-income Americans may not enroll. Premiums may rise sharply, and coverage might unravel: the dreaded "death spiral."

Also ominous is Trump’s silence on Medicaid expansions, the provision in the Affordable Care Act that expands Medicaid eligibility, closing the gap between where eligibility Medicaid previously ended and Obamacare exchanges begin. This may signal Trump’s openness to reducing or defunding the federal contributions to the expansions. Doing so would be devastating to 14.5 million low-income individuals that the Robert Wood Johnson Foundation estimates have insurance as a result of the Medicaid expansions.

Efforts to reduce health care cost growth should be done through increasing program efficiency, not by cutting Medicaid funding (or moving Medicaid to block grants, which essentially cuts future funding), leaving vulnerable Americans at risk of financial catastrophe due to illness.

Finally, note that Trump’s campaign promise of allowing insurers to sell plans across states is irrelevant to the problem of high premiums observed in some places. Premiums aren’t typically high because state regulatory barriers prevent insurers from entering. They are high because the cost of care is high in that area. As the economist David Cutler recently pointed out, an insurer from one state still needs to contract with hospitals and doctors in the new state. Hospitals and doctors there will not give volume discounts to a new insurer with low enrollment. And so new insurers, whether in or out of state, won’t enter these markets, thereby failing to boost competition. Any "victory" on this policy risks distracting from more consequential debates over continued funding for premium support and Medicaid expansions.

Beyond budget priorities and taxes

It remains to be seen whether Trump’s tax and budget priorities, trade policy and financial deregulation help working-class Americans. Aside from the economic concerns discussed in this article, Trump has no plan to address college debt, and has consistently argued against raising the minimum wage. This election year, appealing to populism, while stoking xenophobia and bigotry, proved an effective campaign strategy for Trump. Fanning these flames has already led to numerous racist and anti-Semitic hate crimes — including vandalism, verbal, and physical assault.

So a final thing to watch out for is how Trump responds to ongoing economic discontent. If Trump’s economic policies fail ordinary Americans, either because his populist initiatives are stymied by Republican budget hawks or because his overall agenda is regressive, he may double down on exploiting the fears and anxieties of his supporters.

Far beyond economics, this strategy places social cohesion, public safety, and civil liberties at risk.

Wes Yin is an associate professor at the Luskin School of Public Affairs and Anderson School of Management, UCLA.

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It’s now on America’s institutions to check Trump