On Friday, January 20, 2017, Donald Trump will be sworn in as the president of the US. He has already surprised the global economy since his election on November 9 last year. The stock market was supposed to collapse in panic, but Dow Jones has risen to new heights. The interest rate on long-term debt is at its historic low. There is the lowest level of unemployment in many years and inflation is comfortably low. The debt-GDP ratio has gone to 100%, but that is because of the 2008 crisis since when the ratio rose by 35 percentage points. Even so, the cost of servicing that debt as percentage of GDP is at one of the lowest in the last 50 years. It was at a high of 3% during the 1980s and is now under 1.5%. It is arguable that in macroeconomic policy judgements, one should not take the debt-GDP ratio as an objective since one ends up comparing a stock (debt) with a flow (GDP). But the ratio of the debt servicing costs with GDP is a comparison of two flows. Whatever your debt level, the economic question ought to be whether it is affordable. Given the low interest rates, there is here a good opportunity to borrow. No incoming president could have asked for a better economic situation.
The problems with the US economy are long-run ones. Normally, a macroeconomic policy maker obsesses about the inflation-unemployment trade-off, and no doubt, the Fed is always watching the Phillips Curve. But the real gap is in infrastructure spending where America has not invested properly since the Eisenhower days in the 1950s. There is a trillion-dollar need for renewal. Trump has promised to initiate this renewal programme.
The second problem is of stagnation in manufacturing employment and wages. Incomes have risen in the services sector, but not in the industrial sector. There is the issue of decline in the size of the sector due to competition from China. Manufacturing employment began declining in the 1970s after the Oil Shock, but the decline in the number employed was moderate until 1990. Then, there came a sharp decline due to competition from China. The decline in manufacturing employment and US trade deficit with China are mirror images of each other.
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This problem may prove much more intractable than Trump thinks. He has taken to what the Americans call the bully pulpit to appeal to American firms to relocate from foreign countries to America. This sort of economic nationalism which is fashionable in the developing countries and parades in left wing clothes is economically inefficient. If successful, it will put a cost on the rest of the American economy. Trump may sound like a protectionist, but one can only hope that he will see soon, or someone tells him, that this is not a good idea. There ought to be some investment in re-skilling the former manufacturing workers who are now on the scrap heap. There is no sign as yet that Trump has thought about this.
Trump has threatened to abandon trade treaties with other countries. The TTP has died as Congress refused to ratify it during the Obama presidency. Trump is not likely to revive it though China may step in and organise all the other countries involved in that treaty. Trump has also threatened to scupper NAFTA. This would be very disruptive. Canada and Mexico would suffer serious economic dislocation if the USA reneged on the Agreement. It is not clear as of now if Trump dislikes international trade per se, or whether his dislike is linked to the domestic problems he may have seen around himself.
Before the primaries began, the prevailing theme among economists was secular stagnation. If Trump succeeds in his hope of sending a Budget Message to the Congress which is ambitious in terms of its size and goal. Congress will be friendly. To begin with, if all goes well, Congress will accept his ambitious spending policy. Then, the fear of secular stagnation can be forgotten.
The effects of an American fiscal spending boost will surely lift up many boats in the so-called Third World or emerging economies. This will stave off recession or the long-run low growth/low productivity problem. It is early days yet, but Congress will grant Trump what he asks for; this is, at the very least, because infrastructure spending will be spread across the country and as House members face elections in 2018, they would want quick results. That may work for the economy, for the president and for re-election of Republicans to the House.
Trump is a lucky man to come at the right moment. He may yet mess it up, but let us hope not.
The author is a prominent economist and Labour peer