Economic policies of Donald Trump

The first admission about writing on the economic policies of Donald Trump is that nobody can be entirely sure what it will be – perhaps even Donald Trump himself. Campaign promises are one thing, but the reality of a Republican controlled Congress, may be something else. I don’t think it unreasonable to think that the reality of Congress may limit the more ‘populist policies’ of higher government spending and rising tariffs.

Nevertheless Donald Trump’s economic policies are likely to involve:

  • Tax cuts (predominantely for high-income earners and wealthy)
  • Increase in infrastructure spending
  • Reform of health care
  • Repeal of environmental and financial stability legislation.
  • Bigger budget deficit
  • Increased tariffs – at least with Mexico / China.
  • Increased minimum wage?

Tax cuts

Proposed tax cuts include the top individual income tax rate would be reduced to 33% and the corporate tax rate to 15%. It would also eliminate the estate tax.

According to FT, this would see the highest income tax payers see a 14% fall in after tax income. The poorest 20% would see taxes fall by just 0.8%.

According to the tax policy centre as a result of these tax cuts, Federal revenues would fall by $6.2 trillion over the first decade before accounting for added interest costs. Including interest costs, the federal debt would rise by $7.2 trillion over the first decade and by $20.9 trillion by 2036.

This policy, backed by most Republicans, is likely to pass through Congress.

Increased infrastructure investment

The increase in infrastructure spending is not traditional Republican economics. However, it is focused on tax credits for private sector intervention rather than standalone government spending.

It means that the infrastructure spending may miss the projects with poor commercial return and most social benefit. As Larry Summers notes in FT – private sector led infrastructure spending is likely to miss the least commercially valuable investment, such as 60,000 structurally deficient bridges, upgrading schools or modernising the air traffic control system

Impact of deficit spending

US Budget deficit
Steady reduction in US budget deficit since 2008/09 recession. But will this be reversed?

 

It is uncertain how much the deficit will rise, Republicans (who in the past have tried hard to limit the debt ceiling) may demand spending cuts elsewhere. But, for the moment, most expect a degree of fiscal expansion – higher borrowing.

The impact of this will be

Some form of economic stimulus. Capital infrastructure spending will create jobs in the construction sector. Tax cuts will provide a boost to demand. However, it is worth noting that since tax cuts are concentrated on the most wealthy, the marginal propensity to consume (and therefore rise in demand) will be lower than if tax cuts had been focused on the lowest-income groups.

It is reminiscent of the trickle down economics of the Reagan years.

Rising bond yields

Since Trump’s election we have seen a rise in US bond yields, this reflects the expectation of higher growth, rising budget deficit and inflation in the short run. Higher bond yields will increase the cost of borrowing for the government. If the Federal government do pursue a form of fiscal expansion, it may enable the Federal Reserve to reverse their long-held policy of very low interest rates. Fiscal expansion could boost growth and inflation, and we could finally see US interest rates rise off the floor.

Impact on dollar

The impact of rising US interest rates would be an inflow of hot money as international investors finally see an economy with above zero interest rates. This rise in value of the dollar would make US exports relatively more expensive and less competitive. The exchange rate effect could partially offset the impact of higher investment spending.

The rise in value of dollar could also strengthen protectionist sentiments as exporters look to tariffs to protect against the impact of a deterioration in competitiveness.

Free Trade and tariff barriers

Since raising tariff barriers was a key campaign pledge, we would expect to see some form of higher tariffs. However, whatever tariffs are increased, America would see an immediate tit-for tat trade war. For example, China has capacity to raise tariffs on US imports of cheap smartphones. A sharp rise in tariff barriers could lead to a negative effect on global growth.

Higher tariffs may give relief to some uncompetitive export industries, but the other side is that it would hit other US export industries which are competitive. It is worth noting that Mexico was the United States’ 2nd largest goods export market in 2015. (US Trade) many US jobs are dependent on exports. Trade wars would also lead to higher prices for some imports.

Overall

At least in the short-term, the effect on the economy is likely to be expansionary. However, it is uncertain how the policies will significantly improve the economic well-being on ‘average workers’ and low paid workers. Erecting tariff barriers and offering tax cuts for wealthy will do very little, on their own, to improve the availability of secure, highly paid jobs for non-college educated workers..

Leave a comment

Item added to cart.
0 items - £0.00