The economy according to Trump

Richard Portes examines Trumpenomics: the president’s likely impact on trade, tax and the dollar.


It was a slogan that was simple and appealing: Make America Great Again. Now, with that slogan having carried President Donald Trump to the White House, he has the chance to show exactly how he will turn the rhetoric into firm policies and put those policies into practice. Meanwhile, the rest of us have the chance to weigh up what effect his policies are likely to have. Will Trump add to America’s greatness? More specifically, what are the possible consequences of his promised economic agenda?

Trump’s trade agenda

Trump is the first seriously protectionist president we have had for several generations. Other recent presidents have certainly put forward protectionist measures: the first George Bush, for example, wanted to impose tariffs on steel and automobiles, but these were slapped down. Trump’s protectionism, however, is of a different order – something far more serious.

One must assume that Trump has been told that many of his protectionist ideas – the imposition of import tariffs, or quotas on goods from Mexico, for example – cannot be put into practice without breaking World Trade Organisation (WTO) rules. Perhaps he will ignore them or simply pull out of the WTO – or something equally foolish.

There are, of course, people around him who will try to steer a more reasonable course. But he has repeatedly said that he wants to renegotiate the North American Free Trade Agreement (NAFTA), and if I were a Mexican policymaker – or indeed, a Mexican worker in manufacturing – I would be seriously afraid that he will try to limit imports from Mexico, particularly from US firms that have relocated production there. The Mexicans will be unhappy – as well as the Canadians. Do you really want to alienate your two big neighbours?

Manufacturing production – especially automobiles – involves very complicated supply chains. It is well documented that the average part that goes into a car produced by a US-based firm – whether it be a Japanese firm in Tennessee or General Motors in Texas – crosses national borders eight times in the various stages of production. That tells us something very important about the integration of the production process, particularly across the US-Mexico border.

If, in renegotiating NAFTA, Trump tries to restrict that movement, it would be hugely disruptive and costly indeed for American firms that engage in this supply-chain management.

He will find it hard to implement his policies. He has said he would impose high tariffs of 35% on manufactured goods whose production has been outsourced to Mexico and which are then brought back into the US. Such measures would be in contravention of WTO rules. Equally, they would be hugely damaging to American producers and American consumers.

Imagine that he does succeed in introducing strongly protectionist measures and they do result in a significant improvement in the US trade balance, particularly by cutting back imports. That would have an inflationary effect, which would hit American consumers. At the same time, it would tend to drive up the exchange rate. The US dollar would rise, which in turn would make American exporters less internationally competitive and make imports more competitive.

In other words, the exchange rate movement would offset the impact of the restrictions on imports. Imposing barriers on imports through quotas or tariffs is not likely to lead to any significant improvement in the US’s international trade position.

NAFTA is not the only issue. Trump has also repudiated the Trans-Pacific Partnership (TPP). In trade terms, it probably doesn’t amount to very much in the short-term. But it matters a great deal in geo-political terms because it opens up the possibility that China will replace the US as a favoured partner in trade and other relationships with other Southeast Asian nations.

Moreover, the idea that the US and Britain are going to conclude a deal by the time the UK leaves the European Union (EU) is fantastical. Not only is there the small matter that it would be illegal under EU law for Britain to start negotiations before it actually leaves, but there are also huge issues to be resolved such as genetically modified organisms, for example. There’s a range of potential obstacles even for a straightforward trade agreement for goods. Establishing rules to cover services, intellectual property rights and so on will be yet more difficult. These things take an age to negotiate.

Trump’s taxation agenda

Much has been said by Trump and his supporters about what they call “reform” of the tax system. We normally think of reform as being a good thing – something that indicates progress and improvement. But the Trump tax proposals would be hugely regressive in their effects, lowering taxes for the rich while in some cases increasing them for the poor. The changes being discussed would cut taxes for individuals and corporations, essentially benefitting the rich and owners of capital. And this would be in a society that, over the past 30 years or so, has become more unequal than almost any other advanced nation. Trump’s tax changes would further increase that inequality. They would represent a major step backwards. They are not what the US needs.

In addition, his plans would appear to have the effect of reducing overall government revenues. Past decades have already seen a big cut in the share of national income that goes to the government and which is therefore available for public spending. In 1981, the share was 22% of US national output. It is now 18% – a big fall from an already relatively low base.

Of course, Trump’s supporters argue that cutting corporate and personal taxes would encourage entrepreneurial endeavour and investment: thereby, economic output would be stimulated and jobs would be created. Lower taxes would boost the economy.

Is this realistic?

Compare the US’ position with that of high taxation countries such as the Scandinavian nations where the government takes responsibility for spending perhaps 50% or so of national output. They are consistently ranked among the top 10 countries in the world for productivity and innovation. The US usually sits around 17 th or 18th. Low taxes and low productivity growth; high taxes and high innovation – surely, this is no mere coincidence.

And if taxation is going to bring in less money for the US government, what spending is going to be cut?

One area to focus on is education. A well-funded and effective education system is a fundamental building block of a society which allows and encourages social mobility. In my grandparents’ time, it was true that you could arrive in America with nothing and you or your children could end up with a lot – not only in terms of income and wealth but also in terms of social status. Members of the family of a poor immigrant could become members of the professional class.

Over recent years, why has that movement from the lower tier to the upper tier slowed so dramatically?

In part, it is down to tax policies. It is known that people who are well-off – say in the top 20% of the population – spend far more on the education of their children than do those at the bottom of the pyramid. This spending could be in the form of special tuition or sending their children to private school, for example. So if you start at the bottom, you’re likely to stay there. But if you start at the top, you’re more likely to end up at one of the best schools in the world.

Any regressive changes in the tax system can only exacerbate that.

Furthermore, the decline in public sector education provision that we have already seen has surely been a contributor to the slowdown in the rate of US productivity growth – an area where, in the past, it has been a leader and where it now lags behind many other countries. Yet Trump now wants to appoint as education secretary Betsy DeVos, who has made it clear she doesn’t really believe in public education.

Trump and the dollar

Trump has repeatedly talked about launching a big programme of infrastructure investment. Assuming that it is going to be financed by public funds, then there is bound to be some inflationary pressure.

The last few years have seen steady expansion of the US economy. The unemployment rate is less than 5%, but I don’t believe the economy is yet at full employment: there are many individuals who dropped out of the labour force in the wake of the financial crisis who could yet return.

Nevertheless, if the US Federal Reserve were to see a big fiscal stimulus from a programme of infrastructure spending, then it would certainly react by raising interest rates.

Fiscal expansion and monetary contraction: this is classic macroeconomics. It would lead to an appreciation of the dollar and that would moderate the effect of the stimulus provided by the extra government spending.

In short, it adds up to a recipe for a stronger dollar. The US trade deficit is already considerable. You could say that even at its current level, the dollar is over-valued. It would not be wise to push it higher, yet this is what is likely to happen.

Great again?

We have some indication of what Trump would like to do. But that could be very different from what he will actually do. Within his cabinet and among his economic advisers there will be conflicting opinions. We simply don’t know which of those opinions will prevail. And we don’t know how many of his aspirations will, when confronted with hard economic reality, be achievable. We face a huge amount of uncertainty. I would not bet on anything.

Will Trump make America great again? He won’t make it any greater than it is already. He is likely to be terrible for the American economy. To use one of the words he so loves when tweeting: Sad!

Comments (7)

Jitendra Mohanani 5 years, 1 months and 18 days ago

Interesting analysis. Great mix of humor and insight.

goldmeg 5 years, 11 months and 26 days ago

It should be noted that the author is very credible. Richard Portes is Professor of Economics at London Business School and President of the Centre for Economic Policy Research.

urban spaceman 5 years, 11 months and 26 days ago

This is an interesting analysis, but beware in mind the POTUS wouldn't have the patience (or focus) to read beyond the first paragraph.

urban spaceman 5 years, 11 months and 26 days ago

This is an interesting analysis, but beware in mind the POTUS wouldn't have the patience (or focus) to read beyond the first paragraph.

urban spaceman 5 years, 11 months and 26 days ago

This is an interesting analysis, but beware in mind the POTUS wouldn't have the patience (or focus) to read beyond the first paragraph.