Economics played a major role in
the victory of Donald Trump. Rising income and wealth inequality has meant that
median incomes in real terms in the U.S. have been stagnant for four decades
and those in the middle income deciles of the income distribution have been
squeezed. The causes of this inequality have been blamed on global trade
agreements, immigration, and off-shoring.
There has also been a hollowing out effect due to technological change –
routine jobs such as bank clerks have been computerised – which has had a
negative effect on middle class wages. Trump’s constituency is largely
comprised of this squeezed middle.
The big question about Trump’s
economic policy is whether he will stay true to his constituency. If he does,
we can expect the rolling back of trade deals, the introduction of tariffs,
trade wars with China, and limits on immigration. However, before the world
loses sleep over this, we need to remember that Trump is a businessman and his
outlandish suggestions (for example, the infamous Wall) may simply be him
taking an extreme negotiating stance so that he gets what he wants in terms of
trade deals or limits on immigration. By appearing to be crazy, Donald Trump
may deliberately be increasing his bargaining power both internally and on the
global stage. Furthermore, Trump’s anti-globalisation rhetoric may simply have
been a ploy to get elected.
As a businessman, and given that
many of those who voted for him are small business owners, Trump is likely to
implement policies which stimulate business creation and growth. We can expect
deregulation of some industries, financial deregulation (e.g., the repeal of
Dodd-Frank) and the slashing of corporate tax rates from 35 to 15 per cent.
This latter policy change could trigger the repatriation of corporate profits
from overseas and discourage U.S. firms from making FDI investments. This, of
course, has major ramifications for the north and south of Ireland.
We can also expect Trump to
invest in U.S. infrastructure, which is crumbling. Notably, the stocks of
construction companies and extractive industries responded positively to
Trump’s election. Infrastructure spending will be financed by increasing public
debt, which is already high. Ironically, many Democratic economic commentators
have been calling for infrastructure investment financed by public debt to
boost productivity and as an answer to America’s economic malaise.
In my opinion, possibly the most
important policy question which faces Trump is what to do with the Federal
Reserve and Janet Yellen. Trump may want to curb the power of the Fed and give
it a new mandate, particularly if he wants higher economic growth and plans to
issue so much public debt. In addition, if he is going to fight trade wars, he
will need a compliant Federal Reserve willing to inflate the currency.
Trump is something of an economic
enigma. One part of him is populist with his attacks on free trade and
globalisation. Another part is pure Keynesian with his debt-financed
infrastructure expenditure. A final part of him is a free-market supply-sider,
with an emphasis on deregulation and tax cutting.
Ronald Reagan is extolled by
conservatives because of his bold economic policies which helped the U.S.
escape the stagflation trap. Reagan’s real genius was in surrounding himself
with a very smart economic team. One look at Trump’s economic advisory team of
billionaire businesspeople and hedge fund managers suggests that he, like
Reagan before him, is surrounding himself with smart people who understand the
economy. This suggests to me that the threat of a Trump presidency to the U.S.
and global economy may not be as great as implied by his pre-election rhetoric.
This post is from QPOL.
