Will Trump Change Track?
Protection and isolation will not lift growth, income and jobs in the US economy
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…