As US president-elect Donald Trump fills his Cabinet, what have we learned about the likely direction and impact of his administration’s economic policy?
To be sure, enormous uncertainties remain. As in many other areas, Trump’s promises and statements on economic policy have been inconsistent. While he routinely accuses others of lying, many of his economic assertions and promises — indeed, his entire view of governance — seem worthy of Nazi Germany’s “big lie” propagandists.
Trump will take charge of an economy on a strongly upward trend, with third-quarter GDP growing at an impressive annual rate of 3.2 percent and unemployment at 4.6 percent last month.
Illustration: Mountain People
By contrast, when US President Barack Obama took over in 2009, he inherited from former US president George W. Bush an economy sinking into a deep recession. And, like Bush, Trump is yet another Republican president who will assume office despite losing the popular vote, only to pretend that he has a mandate to undertake extremist policies.
The only way Trump would square his promises of higher infrastructure and defense spending with large tax cuts and deficit reduction is a heavy dose of what used to be called voodoo economics. Decades of “cutting the fat” in government has left little to cut: federal government employment as a percentage of the population is lower today than it was in the era of small government under then-US president Ronald Reagan about 30 years ago.
With so many former military officers serving in Trump’s Cabinet or as advisers, even as Trump cozies up to Russian President Vladimir Putin and anchors an informal alliance of dictators and authoritarians around the world, it is likely that the US will spend more money on weapons that do not work to use against enemies that do not exist.
If Trump’s health secretary succeeds in undoing the careful balancing act that underlies Obamacare, either costs would rise or services would deteriorate — most likely both.
During the campaign, Trump promised to get tough on executives who outsource US jobs. He is now holding up the news that the home heating and air conditioning manufacturer Carrier is to keep about 800 jobs in my home state of Indiana as proof that his approach works. Yet the deal will cost taxpayers US$7 million, and still allow Carrier to outsource 1,300 jobs to Mexico.
This is not a sound industrial or economic policy and it will do nothing to help raise wages or create good jobs across the country. It is an open invitation for a shakedown of the government by corporate executives seeking handouts.
Similarly, the increase in infrastructure spending is likely to be accomplished through tax credits, which would help hedge funds, but not the US’ balance sheet: Such programs’ long track record shows that they deliver little value for money. The cost to the public will be especially high in an era when the government can borrow at near-zero interest rates. If these private-public partnerships are like those elsewhere, the government will assume the risks, and the hedge funds will assume the profits.
The debate just eight years ago about “shovel-ready” infrastructure seems to be a distant memory. If Trump chooses shovel-ready projects, the long-term impact on productivity would be minimal; if he chooses real infrastructure, the short-term impact on economic growth would be minimal. And back-loaded stimulus has its own problems, unless it is managed extremely carefully.
If Trump’s pick for Treasury secretary, the Goldman Sachs and hedge-fund veteran Steven Mnuchin, is like others from his industry, the expertise he will bring to the job will be in tax avoidance, not constructing a well-designed tax system.
The “good” news is that tax reform was inevitable, and was likely to be undertaken by US House of Representatives Speaker Paul Ryan and his staff — giving the rich the less progressive, more capital-friendly tax system that Republicans have long sought.
With the abolition of the estate tax, the Republicans would finally realize their long-held ambition of creating a dynastic plutocracy — a far cry from the “equality of opportunity” maxim the party once trumpeted.
Large tax cuts and large expenditure increases inevitably lead to large deficits. Reconciling this with Trump’s promise to reduce the deficit will probably entail a return to Reagan-era magical thinking: despite decades of proof to the contrary, this time the stimulus to the economy brought by tax cuts for the rich would be so large that tax revenues would actually increase.
This story does not end well for Trump’s angry, displaced rust belt voters. Unhinged budgetary policies would induce the US Federal Reserve to normalize interest rates faster. Some see incipient inflation (given the low unemployment rate); some believe the long period of ultra-low interest rates has distorted capital markets; and some want to “replenish their ammunition,” so that the Fed can lower interest rates should the economy slow down again.
Trump has argued that the Fed should raise interest rates. The Fed, which took the first step toward normalization in early this month, will almost certainly deliver — and Trump would soon regret what he wished for. There is a good chance that the monetary contraction will outweigh the fiscal stimulus, curbing the Obama growth spurt currently under way.
Higher interest rates would undercut construction jobs and increase the value of the US dollar, leading to larger trade deficits and fewer manufacturing jobs — just the opposite of what Trump promised.
Meanwhile, his tax policies would be of limited benefit to middle-class and working families — and would be more than offset by cutbacks in healthcare, education and social programs.
If Trump starts a trade war — by, say, following through on his vow to impose a 45 percent tariff on imports from China and to build a wall on the US border with Mexico — the economic impact would be even more severe. Trump’s Cabinet of billionaires could continue to buy their Gucci handbags and US$10,000 Ivanka bracelets, but ordinary Americans’ cost of living would increase substantially; and without components from Mexico and elsewhere, manufacturing jobs would become even scarcer.
To be sure, a few new jobs would be created, mainly in the lobbying shops along K Street in Washington, as Trump refills the swamp that he promised to drain. Indeed, the US’ bog of legal corruption is likely to reach a depth not seen since then-US president Warren G. Harding’s administration in the 1920s.
And there really is no silver lining to the cloud that now hangs over the US and the world. As bad as his administration will be for the US’ economy and workers, its policies on climate change, human rights, the media, and ensuring peace and security are likely to be no less damaging for everyone else.
Joseph Stiglitz, recipient of the Nobel Memorial Prize in Economic Sciences in 2001 and the John Bates Clark Medal in 1979, is a University Professor at Columbia University.
Copyright: Project Syndicate
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