Thursday 10 November 2016

The Economic Consequences of Trump

On a personal level, I am appalled by President Trump. His personality has no redeeming features. He is vain, petty and nasty. His stirring up of racial tensions risks creating a monster. His misogyny is particularly unbecoming. His authoritarian impulses can only be described as fascist (although fortunately without a personal army). His habit of lashing out every time he feels personally slighted is dangerous. Honestly speaking, the thought of him as president makes me feel physically sick.

On a policy level I am particularly worried about the damage done to the environment by the combination of Trump and a Republican congress - which could undo the fragile progress made in Paris towards reducing global greenhouse gas emissions.

But economically I think there is a reasonable chance that he will bring large economic growth and I can see him being seen to be a great success based on this alone. For me the real shame is that some of his policies were not enacted sooner; if so we would not have seen Trump (or Brexit in the UK, or any of the right wing leaders who have been gaining popularity in the austerity world).

People argue that the US has been running government deficits already but the problem is that the size of deficits required to keep the economy growing has increased a lot with the increase in private sector debt and inequality. In fact Obama's deficits, although higher than Europe (hence the greater GDP growth in the US than Europe since 2008) have been lower than required. The economy is still running a long way under capacity, as evidenced by the marked decline in the productivity growth rate since 2008.

No-one really knows exactly what he will do, and for this reason this is somewhat speculative. But if we divide his actions into three main categories we can look at potential impacts of each one.

1) Deficit Infrastructure Spending: There is talk of a 2 trillion infrastructure project. This works out as around 3% of GDP each year spent. If this were done alone with no offsetting policies, then even ignoring the increase in future capacity, I think we would be looking at a minimum of 2% more real GDP growth per year. Trump's 4% per year growth figure is very much achievable and would bring great benefits to the nation as a whole - improving the lives of many of the people who voted for him.

2) Very Large Tax Cuts: Here the outlook is not so good. Some of his proposed tax cuts - for low earners - would have a very high multiplier on growth and would stimulate the economy. These would be very beneficial.

However, the cuts in taxes for rich people, corporations and on inheritance tax would have minimal effect on demand. They would not increase growth and they also build up problems for the future. The problem is that all of the inequality in wealth created by this makes the economy's saving rate higher. More of the return from GDP goes in interest, rentals and dividend payments for those who do not spend. This means that a) the government debt increases today, and b) the size of government deficits required in the future will be larger.

A big question will be how are the tax cuts and infrastructure spending funded. If it is not with new debt, as assumed above, but actually with reduction of spending on other programmes, then the benefits will be mitigated or even could be negative. A small increase in demand from tax cuts to the rich combined with a large decrease in demand from cutting social security will be net negative.

3) Protectionist Trade Policy: This is a lot more uncertain. Marginally higher tariffs overall do not greatly reduce growth, despite the rhetoric on the subject. The main problem would be in transition from one system to another - causing large disruption. The US is in a fortunate position here, because it is large enough to dictate terms.

There may be some inflation in the US from the supply side, as imports get more expensive or firms re-shore their offshore operations with increased costs. But this will somewhat be offset by greater job opportunities in the US, and in any case the economic growth from the fiscal policy should dwarf this.

Overall, if Donald Trump doesn't mess this up, he could easily be returned for another 4 year term in a landslide in 2020.

Update 12 Nov 16:  Looking at Trump's actual plans I think I was totally over-optimistic. They appear to be a turbocharged  domestic neoliberalism, with a protectionist trade policy.

Trump appears to be doing the bad parts of the above (tax cuts for the rich, protectionist disruption) without much of the good (tax cuts for the poor and middle class, infrastructure building). The infrastructure plans are 'revenue neutral' and not as large as thought. Probably this involves some of the disastrous public private partnerships we have seen in the UK which pay large profits to private companies while loading all the losses on the government.

I think that with a Republican congress, there is a great opportunity for Trump to do what Obama couldn't and run deficits for infrastructure. Unfortunately it appears at the moment that the priority is increasing the gap between rich and poor and making the economic situation worse.

Anyway, we still don't know so hopefully there will be some good surprises to come.