Will Trump Change Track?

Pro­tec­tion and iso­la­tion will not lift growth, in­come and jobs in the US econ­omy

The Economic Times - - Breaking Ideas - Ni­lan­jan Banik

As econ­o­mists, we are trained to as­sume ev­ery in­di­vid­ual is ra­tio­nal (read: smart). He takes all avail­able in­for­ma­tion into ac­count to max­imise his ob­jec­tives. Ob­jec­tives vary.

For a con­sumer, the ob­jec­tive is to max­imise ben­e­fit from con­sum­ing goods and ser­vices, for busi­ness, it is to max­imise prof­its, and for politi­cians, it is to win the elec­tion.

US Pres­i­dent Don­ald Trump is no dif­fer­ent. He won the pres­i­den­tial elec­tion on the back of his pro­tec­tion­ist rhetoric. Would he change his strat­egy given the dy­nam­ics of world eco­nomic order?

Data sug­gest that the US econ­omy faces four head­winds: de­mo­graph­ics, ed­u­ca­tion, debt and in­equal­ity. Trump chose pro­tec­tion­ist strate­gies, tak­ing them into ac­count.

Con­sider de­mog­ra­phy. The high growth of US econ­omy dur­ing 1970s and 1980s was due to a younger work­ing-age­pop­u­la­tion,and­wom­e­nen­ter­ing the labour force. But now, with the re­tire­ment of baby boomers and fewer peo­ple in the work­ing-age group, labour force par­tic­i­pa­tion has fallen. This means lower US real in­come, but more gov­ern­ment spend­ing on wel­fare ac­tiv­i­ties. The el­derly need pro­tec­tion in terms of so­cial se­cu­rity, specif­i­cally lower med­i­cal costs, some­thing that Trump promised.

The costs of US col­lege ed­u­ca­tion have surged, and there are more dropouts. Col­lege com­ple­tion rate is around 15 per­cent­age points lower than neigh­bour­ing Canada’s. Higher ed­u­ca­tion costs have pushed stu­dents to quit mid­way, dent­ing pro­duc­tiv­ity.

The fall in labour pro­duc­tiv­ity has led firms to hire fewer peo­ple. Re­cent data sug­gest a drop in hourly wage rates of con­trac­tual fac­tory work­ers. It is eas­ier to con­vince un­em­ployed Amer­i­cans that their jobs have been taken away by out­siders, and it is time to bring those jobs back.

The prom­ise of im­pos­ing 35% tax on prod­ucts made by Amer­i­can firms out­sourc­ing jobs or build­ing fac­to­ries out­side the US sig­nalled that Trump cares about un­em­ployed Amer­i­cans. By tar­get­ing China, Trump was able to woo vot­ers from the Rust Belt states such as Michi­gan, Wis­con­sin and Iowa, who be­lieved that cheaper Chi­nese im­ports and Mex­i­can labour led to their job loss, and not a fall in labour pro­duc­tiv­ity.

In re­al­ity, this fall in labour pro­duc­tiv­ity and jobs losses are fu­elled by par­a­digm shift in tech­nol­ogy. Tech­no­log­i­cal in­no­va­tions are no longer in­clu­sive. The in­no­va­tions that hap­pened dur­ing last150 years were in­clu­sive. For in­stance, in travel, the econ­omy grad­u­ated from horse-driven buggy to Boe­ing. Elec­tric­ity and own­er­ship of mo­tor ve­hi­cles rose to near 100% from zero.

Long in the Blue­tooth

Mo­bile phones now have more com­put­ing power than the com­puter that launched the rocket to the moon. All this was in­stru­men­tal in rais­ing pro­duc­tiv­ity, and real in­come growth in the US, in a way that no one has ever imag­ined be­fore. But no longer.

In this age of data al­go­rithm and tech star­tups, wealth is be­ing cor­nered by a se­lect few. US reg­u­la­tors have al­ready ap­proved smart pills that send highly ac­cu­rate di­ag­nos­tic in­for­ma­tion from in­side pa­tient’s body to doc­tors via Blue­tooth. Very soon, com­put­ing power of a mo­bile hand­set will equal that of the hu­man brain. A sig­nif­i­cant so­ci­etal dis­lo­ca­tion is wait­ing to hap­pen as ma­chines and ro­bots take jobs of hu­mans.

In this lower-in­ter­est and highly au­to­mated man­u­fac­tur­ing regime, firms and startup own­ers are likely to cor­ner a larger share of wealth, but not­low-skilled­labour­ers.Amer­ic­a­has al­ready trans­formed into a gig econ­omy where the labour mar­ket is in­creas­ingly char­ac­terised by prevalen- ce of short-term con­tracts or free­lance work as op­posed to per­ma­nent jobs. This will has­ten in­come in­equal­ity.

With mone­tary pol­icy in­creas­ingly be­com­ing in­ef­fec­tive in re­duc­ing in­come in­equal­ity, Trump promised to cre­ate jobs through ac­tive fis­cal in­ter­ven­tion. Poor and job­less gain less from a boom­ing stock mar­ket than from gov­ern­ment spend­ing money to build roads and bridges. He also promised to lower cor­po­rate tax rates from to15% from 35%. The Amer­i­cans be­lieved that Trump will bring back good times.

Can Trump in­crease US growth, par­tic­u­larly with a lower labour pro­duc­tiv­ity? In fact, in­crease in gov­ern­ment spend­ing with lower tax col­lec­tions from cor­po­ra­tions means a higher fis­cal deficit. Tax col­lec­tion has fallen due to tech­no­log­i­cal na­ture of busi­ness with com­pa­nies such as Google, Face­book and Net­flix pay­ing lower tax com­pared to man­u­fac­tur­ing firms. Fed­eral gov­ern­ment debt as a share of GDP has grown rapidly: from $5 tril­lion in 2001 to around $20 tril­lion now.

Alarm­ingly, fed­eral bud­get al­lo­cated for non-trans­fer pay­ments-type spend­ing (pri­mar­ily geared to­wards pro­duc­tive R&D-type in­vest­ments) are down from 11.5% of GDP in 1966 to 6.5% in 2016. Debt in pri­vate sec­tor is also in­creas­ing. The prom­ise of a lower tax regime and, hence, fu­ture po­ten­tial prof­its have led many fund man­agers to start buy­ing US junk bonds. In a longer-time hori­zon, with­out in­clu­sive in­no­va­tion, ris­ing fis­cal deficit can­not be sus­tained.

What about trade? US ex­port bas­ket is dom­i­nated by air­craft, au­to­mo­biles, phar­ma­ceu­ti­cal and food items — pre­dom­i­nantly high-skilled man­u­fac­tur­ing items. To an ex­tent, this was pos­si­ble due to US open arms pol­icy, wel­com­ing global tal­ent. Clamp­ing down on skilled labour im­mi­gra­tion may dent pro­duc­tiv­ity.

The Great Wall Mart

Trump has a point when he asked Jack Ma, Alibaba co-founder and chair­man, to cre­ate jobs in the US. Part of the rea­son for fac­to­ries shut­ting down in the Rust Belt re­gion has to do with Wal-Mart stores hous­ing all cheaper Chi­nese con­sumer items. Trump does not have much prob­lem with other largest trad­ing part­ners of the US, such as Canada, Ger­many and Ja­pan. For these coun­tries and the US, the na­ture of trade is more in­tra-in­dus­try type: buy­ing and sell­ing of sim­i­lar high-tech­nol­ogy-in­ten­sive goods. But then, US can­not make ev­ery­thing that it needs.

In­stead, it make sense to fo­cus on items that it can pro­duce more ef­fi­ciently such as high-tech­nol­ogy-in­ten­sive items, man­u­fac­tur­ing that re­quiresin­no­va­tio­nand­not­pro­tec­tion­ism. In the worst-case sce­nario, if pro­tec­tion­ist pol­icy fails to lift the US econ­omy, Trump may have to en­gage mil­i­tar­ily to re­gain Amer­ica’s lost pride.

The writer is pro­fes­sor, Ben­nett Univer­sity

Hey, check again, he said he’ll lay golden eggs…

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