UK: Assessing Mr Trump's Economic Policies

Last Updated: 17 November 2016
Article by Ian Stewart

Donald Trump's policies are as unconventional as his campaign rhetoric. On the face of it Mr Trump may be about to upend the Washington consensus on immigration, government debt, free trade and America's role in the world.  Going through Mr Trump's policies over the last couple of weeks has left me amazed at the scale of his ambitions.

Now the game is on for journalists to establish whether Mr Trump means it all. The notion that he will temporise in government gained traction on Friday when Mr Trump said that, rather than repealing President Obama's health reforms, he might amend them. And on Sunday he diluted his pledge to build a wall with Mexico by saying parts of it might be a fence. But Mr Trump went on to reiterate his commitment to large scale deportations, saying he planned to expel "two to three million" illegal immigrants with criminal records.

Mario Cuomo, three times governor of New York, said that you campaign in poetry and you govern in prose. Mr Trump's campaign may not have been poetic, but it was controversial and attention-grabbing.

Policy under a Trump Administration is likely to be partly prosaic and partly radical. Like all Presidents Mr Trump will change tack or fail in some areas and prevail in others.

President Obama was unable to win Congressional support to close Guantanamo Bay or to push through gun control. But he prevailed with the Affordable Health Care Act which extended health care to millions of uninsured Americans. Mr Obama by-passed Congress and used Executive Orders to significantly extend the campaign of drone strikes against ISIS and the Taliban. And, in 2009, he launched a huge, $100 billion, education spending programme. 

On many big issues Mr Trump will need to carry a Congress which, though in the hands of the Republicans, is unlikely to be pliant. Not winning a majority of the popular vote and the highly controversial nature of much of what Mr Trump has proposed represent additional constraints. 

Mr Trump will arrive in the White House with a record of hostility to free trade which suggests he could become the most protectionist US President since Herbert Hoover in the early 1930s. Mr Trump is opposed to two big trade-liberalised deals, the Trans Pacific Partnership (TPP) with Asia and the Transatlantic Trade and Investment Partnership with the EU. Both now seem likely to fall, and at a time when global trade needs a liberalising fillip. Moreover, scrapping the TPP would create a vacuum into which China could step by creating its own regional trade agreement.

Mr Trump has also suggested that he will repeal, or substantially amend, the North American Free Trade Agreement which, since 1994, has regulated trade between the US, Canada and Mexico. A US President has the power to repeal existing trade deals so Mr Trump seems likely to be able to prevail on this front. He has also said he wants to impose tariffs on Mexican and Chinese imports. Doing so would raise prices for US consumers and could prompt retaliatory tariffs on US exports and, at an extreme, a trade war. The last time the US embraced protectionism was in 1931 when Congress implemented the Smoot-Hawley Act imposing the highest ever tariffs on imports into the US. This measure, and the ensuing retaliation, are widely seen as having contributing to the Great Depression.  

Mr Trump aspires to be a tax-cutting President on the scale of President Reagan in the 1980s. His proposals include more than halving the rate of business tax, taking "millions" out of income tax, cutting the top rate of income tax and abolishing estate tax. The reforms would bring gains across the economy with high earners and corporates benefitting most. The measures, which would require Congressional approval, would boost growth, particularly since Mr Trump plans to combine them with a massive programme of infrastructure expenditure.

This was one of the few areas where Mr Trump and Mrs Clinton agreed. Many mainstream and left of centre economists also support increasing infrastructure spending on the grounds that the US desperately needs to upgrade its roads, airports, and water and energy infrastructure. Record low interest rates would enable the US to do so cheaply.

Big tax cuts and a huge boost to public spending would certainly pep up America's growth prospects. The fact that US equities have rallied since the election suggests that financial markets sense stronger growth lies ahead. But at the same time US government bonds have fallen in value, testifying to concerns about rising government borrowing and more debt issuance.

According to the independent think tank the Committee for a Responsible Federal Budget Mr Trump's plans could lead to an explosion in US government indebtedness, raising the debt to GDP ratio by one third in the next ten years.

Perhaps Mr Trump's most controversial proposals relate to immigration. He has, at various times, said he wants to build an impenetrable wall with Mexico "from day one", that he will deport 11 million illegal migrants and, from "day one", will move out two million criminal migrants. The President has the power to order immigration officials to deport unauthorised immigrants or to ban groups from entering the US on security grounds. But Congress may balk at the vast costs of this, and of building a wall with Mexico.

Consciously or not Mr Trump's domestic economic policies echo those of three past American Presidents - Ronald Reagan, Franklin D Roosevelt and Herbert Hoover.

In the 1980s Reagan's Administration cut taxes, cut regulation, raised spending and presided over sharply higher levels of government borrowing. Roosevelt's New Deal of 1933 aimed to re-boot US growth with a vast programme of deficit-financed spending on bridges, hospitals, schools and dams. And, as we have observed, Herbert Hoover's Administration imposed heavy tariffs on imports in an attempt to protect US jobs from competition.

No one – including Mr Trump – knows for sure what he will be able to do in the next four years. Taking his proposals at face value one of the big questions for economists is whether the boost to growth from tax cuts and infrastructure spending can counter negative effects from protectionism, policy uncertainty and rising government indebtedness.  

It would, of course, be a mistake to take Mr Trump's plans entirely at face value. As the nineteenth century Prussian Field Marshall, Helmuth Von Moltke said, "no plan survives first contact with the enemy".  This is as true in politics as war. Events at home and abroad will shape Mr Trump's plans at least as much as his current campaign stance. George W Bush's Presidency defined by the  9/11 attacks. Mr Obama's has been shaped by the global financial crisis.  

At the moment all we know for sure is that Mr Trump campaigned for what amounts to a revolution in US economic policy. 

PS - A number of readers pointed out an egregious howler in last week Monday Briefing. Ireland's Taoiseach is, of course, Enda Kenny, not Edna Kenny. On a separate matter last week's US election has prompted further criticism of the polling industry. This can be overdone. Both June's UK referendum and last week's US elections were extremely tight contests with usually high numbers of undecided and late-deciding voters. The final Brexit polls were off by about three percentage points on average and most of the US election polls were off by somewhere between two and three points. Most were therefore within the usual polling margin of error for political polls. The greater error seems to have been made by punters. The weight of money being bet overwhelmingly pointed to defeats for Brexit and for Mr Trump. In the US the poll prognosticators were also way off the mark about the election. One quantitative model put the probability of a Clinton victory at more than 99%.

Assessing Mr Trump's Economic Policies

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