President’s strategy
What Trump needs to do next Allister Heath
When it comes to the economy, as in most other things, Donald Trump is a lucky man. They may not yet have noticed it but America’s middle classes, after years of austerity, are finally enjoying bumper pay rises again. Real median household income is now rising at the fastest rate on record, jumping by 5.2pc in 2015, the most recent statistics; last year will undoubtedly have seen pretty decent figures too. This recovery took place under Barack Obama, even if he doesn’t deserve any credit, but Trump will eventually be thanked by the voters.
The most interesting thing about this recovery is that it is very much focused on poorer and middle-class workers. The poverty rate is tumbling and inequality – for those who care about this measure – is falling. The bad news is that incomes are still slightly lower than when they peaked such a long time ago in 1999; Trump will be hoping that that record is finally smashed under his watch.
Boosting real wages and jobs will not just be Trump’s priority but the only metric he will ultimately be judged on, as he made clear in his bombshell inauguration speech. Voters don’t care about GDP, or Wall Street’s performance – they want to return to the days of the real-term annual pay rise, year in, year out. So what can Trump do, assuming that he is able to control at least some of his protectionist instincts?
First, he needs to tackle the US tax system. He has a unique, almost historic, opportunity to move the country a giant step closer to a flat tax of the kind that free-market economists have been advocating for decades. The last president to get close was Ronald Reagan; Trump, with the support of Republicans, could yet pull off an even greater coup. He won’t introduce a single tax rate, sadly, but he wants to slash marginal tax rates on personal and corporate income and drastically simplify a madly complex system.
As part of this, he wants to reduce the double-taxation of income from capital – at the moment, profits are taxed, dividends are taxed, capital gains are taxed and the residual can be taxed again at death. The US corporate tax system, paradoxically for a supposed pro-enterprise nation, is the most antiwealth of any of the major economies. Making sure that US firms no longer have an incentive to hold vast sums of money offshore will be key.
Second, he needs to preserve as much free trade as possible. Yes, that will be tough, especially given his extraordinary speech. One of Trump’s core principles is to renegotiate supposedly unfair trade deals and to pressurise firms not to move factories abroad. This is a dangerous strategy, and an unnecessary one; both sides gain from trade. Let’s hope he does a good deal with the UK: he likes trade with rich countries so let’s capitalise on that.
Third, he needs to slash spending and regulatory burdens. This will be easier said than done, but a new proproductivity and anti-waste approach could save tens of billions of dollars a year in federal expenditure. Entire programmes should be cut, and the government should retrench. Contracts could be renegotiated and discounts wrung out of military and medical suppliers, among others, as Trump has already demonstrated is possible. The Dodd-Frank Wall Street rules need to be torn up, and free markets should be allowed far greater leeway in the energy markets, as well as in all other areas.
Fourth, he needs to improve infrastructure, while trying to get the private sector to pay for as much of it as possible. Last but not least, he needs a new approach to monetary policy and the dollar. It is sometimes said that no real-estate man ever wants higher interest rates, but unless the endless manipulation and debasement of the dollar is ended, America will remain stuck in its artificial, imbalanced and ultimately unsustainable state.
If the President pulls even half of these off, he will be amply rewarded by voters. The great, historic danger is his protectionism: a proper trade war with China or the demise of the international liberal order would deal a disastrous blow to the world. Trump may be do a lot more good than bad, or he may be a catastrophe: we shall find out, and far more quickly than anybody expected.
‘Voters don’t care about GDP – they want a return to real annual pay rises’