Trump’s US will clearly pur­sue its self-in­ter­est

The Star Early Edition - - OPINION & ANALYSIS - Hamish McRae

SOME­TIMES the mes­sage is wrapped up in high­fa­lutin rhetoric, some­times you get it straight. We got it straight on Fri­day. The US will pur­sue its own self-in­ter­est, or at least what it sees as its own self-in­ter­est, and the rest of us have to ac­cept that. Pres­i­dent Don­ald Trump’s speech had the virtue of clar­ity; we know where we stand.

From an eco­nomic per­spec­tive there are sev­eral lessons. One is that US fis­cal pol­icy will be more in­ter­ven­tion­ist. The fed­eral gov­ern­ment will bor­row and spend more. That will have an im­pact on the fi­nan­cial mar­kets. We can, for ex­am­ple, ex­pect a faster rise in in­ter­est rates than seemed likely a few weeks ago.

We can also, in the short term at least, ex­pect faster growth – though the idea that a pres­i­dent, how­ever am­bi­tious, can mag­i­cally dou­ble the un­der­ly­ing rate of growth of the huge US econ­omy is ab­surd. The rich will do bet­ter from tax cuts, but the size of the pot is what mat­ters. You can puff the econ­omy up for a bit. You can tackle long-term struc­tural weak­nesses and that will, over time, im­prove eco­nomic per­for­mance. But coun­tries don’t boom just be­cause a politi­cian says so. That is a prop­erty de­vel­oper’s ap­proach: you say it is go­ing to be bril­liant, you build it, and you hope the pun­ters rush to your door.

Bul­ly­ing cor­po­rates

A sec­ond les­son is that the new ad­min­is­tra­tion will use the range of reg­u­la­tory pow­ers it has avail­able to nudge or bully the cor­po­rate es­tab­lish­ment to do what it wants. That ap­plies to both do­mes­tic and for­eign com­pa­nies. If you are a US com­pany you will bust a gut to ap­pear truly Amer­i­can. If you are for­eign-owned but op­er­ate un­der the cover of an Amer­i­can brand you will keep your head down. And if you are ob­vi­ously for­eign you will stress your com­mit­ment to the Amer­i­can dream.

A third mes­sage is that com­pa­nies will need to re­spond to what­ever changes in tax­a­tion the new ad­min­is­tra­tion can agree with congress. This could hap­pen quickly.

The huge is­sue is what hap­pens to the pile of cash stashed abroad by the high tech gi­ants, cash on which they have paid no tax. There is a deal here. Bring the money back now and pay a low rate of tax on it or keep it abroad and be clob­bered later. Repa­tri­at­ing the bal­ances will af­fect mar­kets, prob­a­bly sup­port­ing share val­ues – though the past few weeks have re­minded us that it is mad to pre­dict mar­ket move­ments on the ba­sis of po­lit­i­cal events.

That thought leads to some­thing of a puz­zle. Will the shift of eco­nomic pol­icy be good for fi­nan­cial con­fi­dence? Con­fi­dence mat­ters, all the more so be­cause the big idea of Trump – that Amer­ica be­comes “great again” – is one of con­fi­dence. (I would ar­gue the US is in­deed great al­ready, thanks in part to its dom­i­nance of the new tech­nolo­gies.) But in­so­far as im­me­di­ate re­ac­tions to the speech mat­ter, it was in­ter­est­ing to see that the in­au­gu­ral ad­dress did not lead to a mar­ket bounce in the same way as the new pres­i­dent’s ac­cep­tance speech af­ter Hil­lary Clin­ton con­ceded.

Mar­ket re­ac­tions

That was telling. The vic­tory speech from Trump Tower on the morn­ing of Novem­ber 9 had hu­mil­ity and grace. It raised hopes that the next pres­i­dent would ac­knowl­edge that he had to lead all peo­ple, not just those who voted for him. The mar­kets loved it, with shares shoot­ing to new highs, with those who had spec­u­lated against him los­ing big. Ac­cord­ing to the Wall Street Jour­nal, Ge­orge Soros lost nearly $1bn (R13.5bn) bet­ting that mar­kets would fall on the Trump vic­tory.

This time it was dif­fer­ent. Trump told peo­ple it was go­ing to be beau­ti­ful. This was a prop­erty you should rush out and buy – but the col­lec­tive judge­ment of the po­ten­tial buy­ers was more of a ho-hum.

That leads to a fi­nal point: pres­i­dents are not all-pow­er­ful when it comes to eco­nomics. They can pull the levers, but what mat­ters is whether there is any­thing con­nected at the other end.

Pres­i­dent Barack Obama han­dled the big­gest re­ces­sion since the 1930s com­pe­tently. He pulled the levers and grad­u­ally en­gi­neered the con­di­tions that did lead to a slow but solid re­cov­ery. Now the US econ­omy is close to full ca­pac­ity. It may be that the tax and other changes that are in store will boost that ca­pac­ity, and the tax sys­tem cer­tainly needs re­form. But it takes time.

Mean­while, there is still such a thing as the eco­nomic cy­cle, and some­where out there in the fu­ture lies the next global re­ces­sion. – The In­de­pen­dent

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