With all the campaign blather, posturing and hyperbole, we don’t know much about the specifics of President-elect Trump’s economic policy. One thing is clear: it is not possible to satisfy the inchoate economic expectations of those who elected him.
Let’s focus on a couple of economic issues where he has articulated policy positions: notably trade and taxes. On trade, a briefing published by the well-regarded Peterson Institute argued that '[Trump's] stated approach to the global economy of waging trade war and protecting uncompetitive special interests would be disastrous for American economic well-being and national security’, but they also accept that he may not do all this in practice. NAFTA worked pretty well for America – US manufacturing output grew strongly after 1984 1994 and manufacturing employment grew until 2000. Even when China became 'manufacturer to the world' after 2001, American consumers got the benefit of astonishingly cheap goods and the international competition was a powerful motive for productivity improvement in America. American manufacturing would find it difficult to unwind its deep involvement in global supply chains.
It’s simply unrealistic to think that American workers can replace the low labour costs now available not just through imports, but through technology. It is robots and computers, more than imports, that have taken away manufacturing jobs. Reversing this would be like accepting that the Luddites were right and re-installing hand-looms to produce textiles. Perhaps it could be done, but the result would be patently absurd.
China has a large bilateral trade surplus with America, and thus might be the first target for a substantial tariff designed to reduce US imports. The one thing economists agree on is that such action would lower living standards in America: whatever low-productivity jobs were created would be more than offset by higher prices for consumers. At the irrefutable level of macro-economic identities, cutting America’s external deficit requires either more saving or less investment. Neither of these is part of the Trump vision. Even Fred Bergsten, who railed against China’s depreciated exchange rate for more than a decade, now (belatedly) accepts that China is not a currency manipulator. It seems unlikely that other countries would accept a widespread and substantial increase in American tariffs without responding, and this would set in train the kind of protectionist war that was last experienced, so disastrously, in the 1930s.
In short, it seems unlikely that Trump will make wide-ranging or dramatic moves in the trade area because the self-harm to America would be quickly apparent. The more likely outcome is a greater readiness to impose anti-dumping protection for individual industries such as steel, where the justification is spurious but the overall damage is relatively minor and barely apparent.
New trade agreements (notably Trans-Pacific Partnership and the TTIP) are off the agenda, but this is no great loss to the global economy. These were largely motivated by US industry to strengthen its global competitiveness in intellectual property and foreign investment. Excluding China, the world’s largest trading nation, from the TPP was a reflection of its distorted vision. Reaping the full benefits of globalisation would require more international rules than currently exist, but these rules will have to be developed over the longer term in multilateral forums such as the WTO, rather than by vested interests of the most powerful participants. Meanwhile, TPP participants can still go ahead with the sort of economic reforms which participation was going to encourage – unilateral reduction in protection. Progress can be made in alternative plurilateral arrangements, such as the RCEP. Trade agreements such as the US-Australia FTA seem likely to survive, if only because American companies would, out of self-interest, strenuously oppose their abandonment.
On macroeconomic policy, Trump favours tax cuts, especially for business. No doubt he will do something here, and the big-end of town will be the beneficiary (hence the positive reaction of the stock-market to his election). America’s corporate tax rate (35%) is, indeed, high by world standards. Lowering company tax is a global trend, so reducing America’s rate might be no bad thing. If doing a deal on foreign earnings of US companies (which currently escape US tax) encourages a reflow to the US, this might have perceptible effects on exchange rates (appreciating the US dollar), boosting domestic investment if companies can find profitable projects at home and increasing budget revenue.
The constraint on Trump’s room-to-manoeuvre here is the Republicans’ aversion to budget deficits. It might be argued that the growth-enhancing effects of lower taxes would be large enough so that the budget actually benefits (Art Laffer, of Laffer-curve fame, predicted the Trump victory and is a possible candidate for Trump’s administration). Reality would, in time, assert itself, but not before the budget deficit has blown out.
A temporary budget stimulus might not be such a bad idea, in itself. The principal macro-economic mistake of the post-2008 recovery was the contractionary effect of budget consolidation in the crisis-affected economies. While it is too late in the recovery to correct this mistake, the US economy has unfulfilled infrastructure needs. There is room for some stimulus: unemployment is back to normal, but labour-market participation has not recovered, so there is opportunity to draw in discouraged workers.
In the longer-term, however, tax cuts are incompatible with balanced budgets. Of course President Trump might cut budget expenditure, but US government expenditure is already close to the lowest among OECD countries. If Trump were serious about redressing the impact of globalisation on less-skilled workers, this actually would require much more budget expenditure, for education and retraining.
Trump is unhappy with the Fed’s monetary policy, but he can’t wreck the system before 2018, when Janet Yellen’s term expires. He can appoint his own people to the Fed board as vacancies occur, but they can’t dominate it in the short term and the Congress approval process should keep the nutters out. If they encourage interest rates to rise faster than otherwise this, again, may be no bad thing. Near-zero interest rates are distorting economic decisions and the Fed is in any case just about ready to start the tightening phase, with a jittery market restraining the speed of rise in interest rates. Rebalancing macro policy, with an easing on fiscal and some increase in interest rates, might actually be sensible.
A Trump economy is thus likely to be one of slower productivity growth, weighed down by the inefficiencies of greater protection and by reduced immigration from highly-productive workers such as IT specialists. Income distribution will be worse because of tax cuts and shrinkage of Obamacare. None of this addresses the central economic cause of discontent among Trump’s constituents – those workers without college education whose comfortable economic position in the half-century following WWII has been overturned not so much by globalisation, but by technology and by competition from non-white, highly motivated immigrants. The grim truth is that this relatively comfortable life is ‘gone with the wind’. Without substantially more education and skills, these workers will not find a satisfying role in a modern economy.
Trump can tinker at the edges, protecting individual industries and reducing low-skill immigration. Economies are resilient, and the downside of radical policy shifts is most often immediately (and embarrassingly) apparent. This limits but does not eliminate the harm that can be done. There will be damage, but the economic sky is not going to fall in. The saddest thing, however, is how unhelpful these policies will be for the constituents who elected Trump.
Photo: Getty Images/Angelo Merendino
