National Post (National Edition)
HANDS BEHIND AMERICA
For a champion of FREE ENTERPRISE, Trump seems bent on intervening in the marketplace with his NOT-SO-INVISIBLE HANDS. Ricocheting between market intervention and laissez-faire CAPITALISM, TRUMPONOMICS is a puzzle for economists.
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 probusiness, they’re not promarket. 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 antitrust 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 U.S. 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 Dodd-Frank, 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 federal 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-toGDP 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.