TRUMPONOMICS: A MIX OF FISCAL CONTRADICTIONS
Economists left questioning president’s direction
Donald Trump makes news every day with fresh tweets, executive orders and his ongoing battles with mainstream media, but his recent public pronouncements on economic issues are consistent with the old pledges he made during his campaign rallies.
Although his economic plans have yet to work their way through the legislative meat grinder that is the U.S. Congress, they are a contradictory mix so far, ping-ponging between market intervention and laissez-faire capitalism.
For a champion of free enterprise, Trump is content to intervene in the marketplace with his not-so-invisible (and reportedly undersized) hands by introducing protectionist trade policies and big infrastructure projects. But at the same time, he’s promised to slash regulation and bring in tax cuts that heavily favour the rich elite.
It leaves some economists perplexed.
“We’re all struggling to figure out what he means,” said Andrew Kenningham, chief global economist at Capital Economics Ltd. in London. “We have this conventional wisdom about how we run a modern economy, which is in favour of rules, transparency, consistency, globalization — all of those things. And he’s going to question all of them.”
Trump probably doesn’t care what economists think. His movement is a rebellion against the intelligentsia in media, government, business and academia. He likely sees economists who question his policies as no different than the pollsters and pundits who said he’d lose the U.S. election.
One way or another, however, economics textbooks a generation from now will have chapters on Trumponomics. He’s probably confident the texts will document his triumph. “I am going to be the greatest jobs president that God ever created. Remember that,” he said during the campaign.
But a lot of Trump’s ideas have been tried before. Gutting business regulations and slashing taxes hearken back to the Ronald Reagan era of the 1980s. His protectionism recalls the anti-trade Smoot-Hawley tariff of the 1930s. His preference for exports over imports is something you might have heard from an 18th century European mercantilist in a puffy wig.
The novelty is that we’ve never seen those ideas mixed together in a recent U.S. government. Stephen Gordon, economics professor at Laval University in Quebec City, suggests the apparent contradictions might be because Trump sees the world as a businessman, not as an economist.
“Business people are pro-business, they’re not pro- market. There’s a difference,” Gordon said.
Gordon’s point is that managers want to structure their businesses to eliminate risk. If they can use their market power to minimize free market competition, they will. That’s why governments have to pass and enforce competition and anti-trust laws.
“In the heart of every CEO beats the heart of a central planner,” Gordon said. “If you’re running a government in a market-oriented economy, your basic thing is to accept the rules, and let things go. You’re not supposed to intervene.”
You could argue that Trump is merely responding to a contradiction in the orthodoxy.
You can’t have rules to govern free markets without having a government intervene to create those rules. His movement is a rebellion against the political and financial elites that have written those rules.
Even so, Trump’s policies likely won’t upset many in financial circles since he wants to loosen the government’s regulatory grip on business. He’s signed an executive order that says for every new regulation issued, at least two prior regulations must be identified for elimination.
One of his first targets is DoddFrank, a series of rules brought in to curb the excesses of Wall Street that led to the 2008 financial crisis. Trump said these rules have now made it too hard for banks to lend. He may be right. Regulation is always a balancing act. Wall Street is cheering the change so far, but whether consumers and small business people will also win remains an open question.
Trump also believes in low taxes, particularly for the rich. According to a CIBC study, 80 per cent of his proposed tax cut package would benefit the richest 10 per cent of Americans. Trump argues that slashing U.S. tax revenue will stimulate the economy enough to pull the budget back into balance. This embrace of supply-side economics is straight out of Reagan’s playbook.
Benjamin Tal, deputy chief economist at CIBC World Markets Inc., isn’t convinced Trump’s aggressive tax cuts will work because the U.S. economy is not in as much trouble today as it was when Reagan took office in 1981.
Reagan’s tax cuts came when the U.S. economy was in recession, the debt-to- GDP ratio was less than 40 per cent, and interest rates were dropping. Trump will unleash his tax cuts as the U.S. economy is growing, the debt-to- GDP ratio is at 100 per cent, and interest rates are starting to climb.
Trump’s plan needs the U.S. economy to grow at four per cent a year so any new tax revenue generated by the economic expansion will make up for the revenue lost from the tax cuts. If the economy falls short of that four-per-cent target, the debt-to- GDP ratio will start to rise, which will alienate the Republican deficit hawks in the U.S. Congress.
“That’s when the honeymoon will be over,” Tal said.
Trump is also promising a 10year, US$1-trillion infrastructure program. He said his plan has two simple rules: buy American and hire American.
But break up the infrastructure plan over time and it may not offer the bang his supporters expect. Tal said he thinks the plan could create 50,000 jobs a year in an economy that is already creating 2.5 million jobs a year. “That’s peanuts,” he said.
Four years from now, Tal said, economists will look back at the Trump era as an experiment that failed.
“He is trying to provide very, very simple solutions to very complex problems,” he said. “I think that Trump will be seen as the one who basically revealed the fact that the solutions are not simple.”
Take Trump’s embrace of protectionism. He is looking at bringing in a “border adjustment tax” to coax U.S. manufacturers to make more of their products at home. Some see a parallel between this tax and the dreaded Smoot-Hawley tariff, which in 1930 raised U.S. duties on more than 20,000 imported goods. The result only helped to deepen the Great Depression.
“On the surface, you would think that this is the most protectionist president the U.S. has possibly ever seen, or at least since the SmootHawley tariff,” said Derek Holt, head of Capital Markets Economics at Scotiabank.
The border tax is actually part of a corporate tax reform plan backed by Paul Ryan, the Speaker of the U.S. House of Representatives. The idea is to replace the current corporate income tax of 35 per cent with a 20-per-cent tax on a company’s domestic revenue, less deductions for domestic costs, and no deductions for imported goods or labour. Tax on foreign revenue would be eliminated.
Including the border tax in a much larger package of corporate tax reforms is designed to block other nations from attacking the move as offside of World Trade Organization rules. Economists aren’t so sure that will work.
“Trade is a two-way street. If the U.S. brings in protectionist measures, then there’s certainly the risk of retaliation,” said Douglas Porter, chief economist at BMO Financial Group. “It’s not as if U.S. exports are going to get a free ride if the U.S. turns tougher with its trading partners. I can’t imagine a place like Europe would just let it pass without some kind of retaliation.”
During the election campaign, Trump railed against the North American Free Trade Agreement, calling it the “single worst trade deal ever approved in this country.” As U.S. president, he hasn’t yet said he will pull the U.S. out of the threeway deal with Canada and Mexico. Talks could instead produce an amended agreement.
Nevertheless, the Canadian government has rushed to remind U.S. officials about the importance of Canadian-U.S. trade. You can’t bump into a Canadian cabinet minister these days who isn’t prepared to remind you that Canada is the biggest trading partner of 35 U.S. states, or that nine million U.S. jobs depend on it. But the only ear that matters is Trump’s, and no one is sure he’s listening.
“There’s so much uncertainty,” said Laura Cooper, economist at RBC Economics Research. “We can’t pinpoint exactly what will be implemented.”
That uncertainty extends to most of Trump’s ideas, which often seem contradictory at best even if he is determined to make them all work. But because Trump the president sounds like Trump the candidate, it is hard to position Trumponomics among the economic doctrines we’ve seen from other U.S. presidents.
We have this conventional wisdom about how we run a modern economy ... And (Trump is) going to question all of them.