Since taking office Trump has proved unpredictable, but what are the likely outcomes of his policies? His executive orders aside, he has not had it all his own way, despite Republican majorities in both houses of Congress.
Yesterday I outlined the economic causes of the rise to power of this ostensibly populist president. This post reviews some of the potential consequences of Trump’s economic policies, as discussed in the book Trumponomics.
Jobs and growth
The centrepiece of Trump’s economic strategy, if in fact it has any coherence at all, is a pledge to put ‘America first’ and raise the growth rate of the US economy from its currently sluggish 2% per annum, to something like 4%. In doing so, he has promised that this will create 25 million jobs over ten years.
The pledge on jobs, if it is achieved, would in fact be nothing special when looking at the US record since the last recession. Creating 2.5 million jobs a year would simply represent a continuation of current trends. If productivity does not improve, then this would not require any acceleration in growth, although it does assume away another recession over the ten year period. Should that occur, unemployment would rise again, which would threaten the achievement. In that case, a faster rate of growth and job creation would need to occur outside any period of slowdown or recession.
There probably is some potential for output and employment to continue rising at current rates for a while, without generating higher inflation. While standard measures of unemployment are now fairly low, there is substantial underutilization of the labour force. Policies which boost demand could help to reduce this by increasing the historically low participation rate and increasing the available work for those who are in part-time or casual employment but want to increase their hours or work full-time.
Making trade fair again
Trump also pledged to intervene in international trading relationships where he considered current agreements ‘unfair’ and detrimental to US growth and employment, particularly in industry.
Mainstream economics continues to see free trade as an unalloyed good thing, whose uneven employment and distributional outcomes should be dealt with by domestic fiscal, regional and employment policies. However, many heterodox economists, particularly those with knowledge of the history of development, reject this thesis.
In the presence of externalities, no automatic tendency to full employment, inequality, persistent trade and capital imbalances, increasing returns to scale and learning-by-doing effects, trade intervention can potentially raise productivity, growth, employment or some combination of the three in particular sectors which can then spill over to the rest of the economy.
This is by no means guaranteed, but almost all the current rich countries used interventionist trade and industrial policies to accelerate their initial development. Only once they had industrialized and were at the top of the economic tree did they press for the adoption of free trade by their trading partners, including the poorest.
Of course, the US is already an advanced country, so industrial policy should take different forms to those that would help poor countries to develop. It is not clear that higher tariffs on manufacturing imports would help the economy as a whole. Even if it reduces the current account deficit somewhat, one of Trump’s professed aims, this could lead to a stronger dollar and actually then worsen the deficit again by making exports less competitive, reducing manufacturing employment, and thus harming some of his supporters.
Trump will have a hard time significantly increasing job-creation in industry. Most advanced economies have experienced a decades-long decline in the share of employment in manufacturing (now 8% in the US), due to its faster rate of productivity growth than the services sector. The latter now dominates employment and output shares in the richest countries, so any sensible policy to improve economic performance would aim to raise productivity, growth and employment across the economy.
Some of Trump’s policy positions find echoes in the Reaganomics of the 1980s, in their mix of faith in ‘trickle-down’ economics and military Keynesianism.
Trickle-down economics proposes that making the already rich richer will make the rest of us richer. Cutting top rates of tax is meant to encourage entrepreneurship and job creation, while discouraging tax avoidance and evasion, thus increasing revenues.
George W Bush tried a bit of this in the wake of the dotcom crash and subsequent recession, but he justified his tax cuts as a Keynesian fiscal stimulus, intended to boost demand, rather than as a supply-side policy.
Trump’s proposed tax cuts overwhelmingly favour the richest, but since top tax rates are already much lower than they were before Reagan came to power, any positive trickle-down effect, if it were to have a positive effect, would be much smaller. The historical record shows that such policies are unlikely to reduce inequality and poverty, even if more jobs are created.
On the spending side, military Keynesianism has been a favourite way for Republicans in power to justify, or at any rate allow, the budget deficit to rise. It involves raising military spending without compensating tax rises. While this may boost aggregate demand somewhat, it is a highly inefficient way of doing so.
Tax cuts for those on the lowest incomes and therefore a higher propensity to spend are more likely to increase consumption, as are spending on public sector job creation or public goods and services. Public investment would also boost demand directly while potentially increasing productivity in the longer term. But these are not the priorities of Republicans, or indeed of the president.
Attacks on welfare
In fact, Trump has proposed slashing the social safety net, which benefits the poorest Americans. This is a nation with an already weak safety net compared with other rich countries, and with higher levels of wealth and income inequality and poverty.
Even if the economy grows faster over the next decade than during the previous one, history shows that this will not be enough to reduce these problems. After all, the economy is much larger and more productive than it was in the 1970s, but inequality and poverty have risen overall, while median wages have stagnated and job insecurity increased.
Trump’s promise to spend $1trn on infrastructure has great potential on the surface. It is widely agreed that the US needs such a policy, following years of neglect by politicians on both sides. Roads, railways, bridges, telecommunications, the internet and the like are the lifeblood of any economy and support the development of the private sector and the growth of productivity. If publicly funded, they can both stimulate demand in the short term, and supply in the longer term.
To date the infrastructure plan aims to rely on private sector funding so as not to increase public borrowing or taxes. This may mean that only projects with a quicker return on investment are carried out.
Infrastructure is certainly one area in which government can take a longer term view than the private sector and bear the risk of the investment. The benefits of the proposed plan may therefore be smaller than if it were carried out by the public sector and may even be more expensive since the government can borrow at a lower rate of interest than the private sector.
In sum then, behind all the rhetoric, and if the president actually manages to pass some of his policies, the interests of the vast majority of already disaffected Americans seem unlikely to be well served by Trumponomics.
Growth is unlikely to rise dramatically. Job creation will continue, but inequality, poverty and insecurity will not be reduced and may even increase. The power and influence of already wealthy elites to shape self-serving policies will become further entrenched; the US may become more like an oligarchy than before. The public realm as a force to improve the common good will be diminished, both at home and abroad.
For many on the left, these are dark times, but they may also represent an opportunity to fight back against the regressive neoliberal agenda of recent decades and help create a brighter future for the majority.
Part 3 of this series, on potential alternatives to Trumponomics, will follow later this week.