Donald Trump’s Economic Policy Agenda, or Can You Stimulate by Protecting?




The American elections were supposed to decrease uncertainty and allow markets to put one of the nastiest and most polarising election seasons in living memory behind. Donald Trump’s victory, which became an irrefutable fact by 6am GMT on November 9th, has all but made that uncertainty chronic. Trump’s economic plan, with its rather haphazard pre-election sketch, is more of a wishlist than a detailed economic policy roadmap. However, putting meat on the bones of the plan will be a key part of the transition period until Trump’s inauguration and could either herald an economic renaissance, or transpire into a terrible disappointment.

The Donald and the past

Throughout his campaign, Trump has taken the position that the economic policies of the Obama administration had failed in bringing about the Promised Land of recovery. Whilst achieving a growth rate of 1.5%-2% after the most severe economic crisis since the Great Depression is no small feat, for Trump and his advisors this is not nearly good enough. US policymakers and the Obama administration have followed the monetarist dictum of decreasing the budget deficit and using monetary policy tools to reflate the economy. Donald Trump has criticised the independent Federal Reserve, voicing the views of many hawkish conservative analysts who believe low interest rates distort incentives, inflate bubbles in non-productive asset markets, and punish frugality by diminishing returns on savings. Whilst it is highly unlikely that Janet Yellen, the current governor of the Fed, will leave before her term ends in 2018, Trump might try to replace her with a more hawkish policymaker who might be willing to risk a recession but return monetary policy to normality.

The trump card

Trump’s strongest economic idea seem to be his proposal of massive new spending on infrasstructure projects, coupled with a sbstantial decrease in corporate taxation. The United States have for years been suffering from chronic underinvestment in infrastructure, a problem that has long been recognised but not resolved by presidential administration, including that of Obama which was forced to work with an uncooperative Senate.

Apart from infrastructure spending, Trump has promised tax cuts for individuals and a decrease of corporate taxes from 35% to only 15%. He has also promised to cut red tape, especially post-crisis legislation such as the Dodd-Frank Act, that according to him are chasing businesses away from the US and stalling job creation.

Economists have been anxious that Trump’s spending stimulus and tax cuts would increase the national debt by more than $5 trillion, whilst pushing up inflation. Indeed, GDP growth figures of 4% to 5%, which Trump has promised as an answer to the supposedly negative comparison with China, which is growing at more than 6%, could not realistically be achieved without the government’s helping hand, whose borrowing will almost certainly stoke inflation. Whilst the Fed can act to parry inflation by hiking up interests rate, the chronic issue of the America public debt will only be exacerbated. If Trump’s rhetoric on China translates into similarly-minded policies, a trade war with China could be sparked, which will affect the American economy’s growth in the medium term.

Paving the road to hell

Trump’s economic success crucially depends on the assumption that his expansionary fiscal policies will spark growth which will be sufficient to increase the tax base and not necessitate any extreme levels of borrowing.

Markets initially reacted with shock and dismay as news of  Trump’s win circed the globe. However, given the chance to digest Trump’s policies with the hope that the most etxreme ones will be checked by a mature and experienced team of advisors, the US stock market recovered, reaching an all-time high on November 9th. Copper prices, which is used as a benchmark by many investors for its predictive abilities, incresed by as much as 3 percent.

Make the world small again

Although Trump’s impact on the American economy could be viewed with cautious optimism, his impact on developing markets and trade is highly uncertain and hinges critically upon the extent to which Trump’s policy will match his protectionist rhetoric. In an ominous sign of what lies ahead, the Mexican peso tumbled by 15% the morning after the election. Oil prices fell to a monthly low on the same day, reflecting fears about global demand spurred by hypothetical American’s protectionism.

Donald Trump comes to the Presidency with the profound chance and opportunity to upend the secular stagnation trends reigning supreme since the Great Recession. However, it seems that success can only come by very narrowly avoiding stagflation, trade wars, a new setback to globalisation that has already been battered by Brexit, the travails of the Eurozone, Russian sanctions, and the politcal backlash against liberalism.

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