We are still a month away from Trump’s inauguration. After that, he has a month before he sends his budget message to the Congress. The budget for this fiscal—the American fiscal runs October to September (why do none of the fiscal years coincide with the calendar?)—means what he can spend for the first nine months is fixed by Obama’s last budget. Trump’s own spending will start in October 2017.
There is no doubt that the signals he has given are of an expansionary budget with a trillion dollars on infrastructure spending and higher defence expenditure as well. We don’t know the time-period over which the spending will be spread, but the message is of a spending president. After years of fiscal timidity and monetary adventurism, it would be good to reverse the roles. The Fed has given notice that after its latest rate-hike, it intends to follow it up with more during 2017. I have been arguing for a tighter monetary policy in the interest of financial stability. QE and the persistence of low rates has set off an asset bubble which could end up becoming another 2008-crisis. That must be averted at all costs. Of course, the Fed and other central banks worry more about price stability/inflation-unemployment trade-off than about financial stability. But inflation rates are still low and there is little danger from that end.
Trump should get his spending plans approved by the Republican Congress. Many of them are deficit hawks and do not approve of raising the debt ceiling. But this is still the honeymoon period, and in 2018, there will be mid-term elections and the Congressmen want to get reflected. Who better than a president who has let them pork-barrel local infrastructure projects?
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The other part of Trump’s programme is tax cuts. He wants to slash tax rates across the board. This will help his vote-bank, who are struggling at the bottom, but also please the Republican rich lobby which expects to be given largesse. It has been estimated that the fiscal proposals could add as much as $7 trillion to the debt, which is 40% on top of the current debt. But this is over ten years. We also cannot forecast income growth; so, the debt-GDP ratio (which is 100% now) is difficult to forecast. Trump has promised a growth rate of 4%, but it remains to be seen whether he achieves that. Even a sustained 3% over ten years would be fantastic.
Given the low bond yields (despite the Fed’s latest move), there is a window of opportunity to stack up borrowing early in the presidency if Congress allows. Trump’s proposed treasury secretary Steven Mnuchin has suggested that the US could issue long-dated, 50-year bonds. This would be the correct strategy if Trump is to deliver on his promises.
It is in his foreign trade stance that Trump is the most worrying. Even before he has taken office, Congress is already threatening import tax. This is on the usually spurious argument that it will relocate manufacturing back in the US. It is sad that such fallacies have never left politics. Trump has threatened to revise NAFTA. Ross Perot fought the 1992 election on an anti-NAFTA plank and lost, but he took enough votes away from George Bush, Sr. to let Bill Clinton win. Trump wants to revisit NAFTA to tweak it in America’s favour but this again is a fallacy. Trade does improve living standards by cheapening imports. It helps countries specialise. America is more efficient in services than in manufacture. But old-fashioned liking for manufacturing brings up the protectionist demand. One has to hope that Trump is frustrated in what he wants because many businesses, mostly SMEs, will lose out, and so will his party in votes at the next election.
Farther still, TPP is dead even before Trump has come. It died a death through exhaustion in the lame duck Congress. It is unlikely that the new Congress will revive it unless Trump changes his mind and pushes it as an anti-China device. I do hope he does not. What is really needed is a new TPP that includes China. But that may be dreaming too far.
As if now all one can say is that if Congress gives Trump what he asks for in spending and tax cuts, he is very likely to set off a strong boom with positive spillover effects for the rest of the world. There are worries about inflation since the rate of unemployment is down at 4.5%. That, however, hides the fact that labour force participation has dropped from 66 million at its peak in 2008 to just around 60 million now; thus, there is some slack if workers are lured back into employment. That will boost incomes of the group which feels deprived and keeps inflation low. It may yet be that Trump may turn up trumps.
The author is a prominent economist and Labour peer