We need to be prepared for Trump’s economic plans appearing to work
Donald Trump is a racist, sexist, ableist bigot. He pulls faces capable of making children cry. He talks like he’s never used words before. He has a name that is basically fart.
All of these things make it hard for most of us to take his views on the economy seriously.
But if we don’t — then we will never understand why 59.5 million Americans voted for him, nor how his portion of the Hispanic and black vote increased, nor how his share of the female vote only dropped by 2% in spite of clear proof of his misogyny and accusations of rape.
Because to be clear: it was Donald Trump’s position on the economy that won him the presidency.
Whatever gains Obama may have made — the US economy is in a dire state. In a recent poll, two thirds of Americans expressed their anxiety about the condition it is in.
Unemployment in America may have fallen (marginally) but it still stands at 7.9 million (5%); this doesn’t account for the rise of the precariat, 6 million part-time workers have said that they are looking for full-time work; 15.8 million households (one in eight) fall below the poverty line, meaning that they are “food insecure”; homelessness in the US has risen to the extent that 1.4 million American schoolchildren in 2014 were registered as homeless.
If we zoom out and take a look at the bigger picture: the richest 1% in America own 35% of all private wealth, more than the poorest 95% combined.
Now, if you poll Trump’s most loyal supporters — you will discover that ostensibly they do not seem to care about poverty and inequality. This comes in at about 4% when they’re asked what they think are the most important issues facing America. Terrorism and immigration come in way higher. But what’s the most popular answer when Trump supporters are asked this question? “The economy in general” (at around 29%).
Time and time again, when white working-class America is surveyed, it is found that it is ‘the economy and their place in it’ that is their number one concern.
You might say: but analysis shows that Trump also made major gains among middle-class voters. To which the obvious answer is: well, of course. Middle-class Americans are among the most badly hurt, economically speaking.
Over the past fifteen years the average income for a middle-class American household (after being adjusted to take inflation into account) has declined by over $4,000.
When Trump supporters are asked why they’re so discontent — they may not answer “poverty and inequality” (possibly because they reject the altruistic undertones of this; possibly because they resent the suggestion that they themselves might fall into this category). But make no mistake: by instead referring to the economy and to immigration they are reflecting widespread concerns about wage decline and the evolution of the job market.
These people are troubled by the ongoing effects of a major recession. They are anxious about how a globalised economy threatens their livelihoods. And with pensions being axed and wages declining they are worried about what the future holds.
Of course, this is no excuse for electing Trump. Economic self-interest doesn’t justify a toleration of bigotry. To be clear: to vote for Trump is to implicitly consent to his divisive politics — and none of us should underestimate the levels of psychological and physical harm that this will do to millions of Americans over the next few years.
And yet — if we want to prevent this situation from worsening, it is vital that we try and understand the conditions that made the widespread forbearance of Trump’s toxic rhetoric possible.
And the fact of the matter is: Donald Trump managed to address the American electorate’s concerns about the economy better than Hillary Clinton. The polls indicate that more than any other factor this swayed voters.
We should be alarmed, then, at the possible prospect of these same economic policies actually seeming to work.
It would be reckless (to say the least) to dismiss this as a possibility. There’s a strong likelihood that Donald Trump’s economic policies will have major advantages for many Americans. In particular, that his economic proposals are very likely to help to create jobs and to increase wages.
If they do — it will be a short-term gain, masking increased inequality and the long-term prospect of a serious decline in America’s fortunes, beginning with inflation, increased poverty levels, unmanageable debt and a strong likelihood of another world-wide recession.
And yet, it’s quite likely that before any of this is felt, Trump’s policies will ensure a brief but possibly explosive period of prosperity. And if that happens — and if his opponents fail to make the case that whatever the positive gains, the long-term damage is too simply costly — then he will very likely win a second term of office.
Time to start paying attention to Trump’s economic policies, then. Especially if you’re concerned about where he has positioned himself on issues relating to race and gender.
So what exactly are the policies in question, and why do I say that they could help to create jobs and to increase wages (albeit in the short-term)?
Let’s start by identifying some of the most significant pledges:
- Renegotiating trade deals to include tariffs. This could include renegotiating big trade deals like NAFTA, TPP and TTIP so that higher tariffs are imposed on imports. It would also involve penalising US based companies who seek to cut costs by exploiting lower employment rates outside of the US (for instance car firms building manufacturing plants in Mexico) and putting pressure on the World Trade Organisation to bring a case against China for currency manipulation, again resulting in punitive tariffs on imports.
- Trump has promised $500 billion on infrastructure spending (almost double Hillary’s proposals). This is mostly construction: improving roads, building walls etc. Think it’s a bluff? The markets don’t. Shares of Caterpillar rose 7% the day after Trump’s election, and US Steel by 20%.
- Major deregulation. Trump has called a ‘moratorium on new federal regulations’ — which of course would include the financial sector. As tax expert Richard Murphy has recently observed: Trump is determined to ensure that many of the regulations imposed post-2008 on the financial services industry will be removed.
- Repatriating corporate profits held offshore. Amazon: pay your tax!
These policy proposals represent an idiosyncratic blend of Reaganism, early 19th century Conservative protectionism and (majorly diluted) Keynesianism: tax cuts and deregulation, anti-free trade nationalism and a commitment to infrastructure building.
Of course you could again say: this bizarre mishmash of ideologies proves how it’s all just bluff. There’s no way Trump actually intends to deliver on all these counts: it was just a madcap electoral strategy! Look at how quickly he reneged on promises to lock up Hillary Clinton and abolish Obamacare with immediate effect!
But to argue this would be to ignore the fact that 68% of previous Republican leader campaign policy pledges have been either partially or fully kept by successful candidates. And there’s an obvious reason for that: you don’t get reelected if you don’t keep policy pledges. Given how wild some of the promises are: the above policy proposals seem the likeliest of all the contenders.
It’s also worth noting that though ideologically inconsistent, all of these policies have one thing in common: they’re about giving the economy a quick fix and boosting jobs. And let us not forget that Trump’s number one strategy has been to appeal to a disenchanted America fed up of falling wages and part-time work. In his first speech upon hitting the 270 vote threshold, he described his supporters as a ‘great movement, made up of millions of hard-working men and women who love their country and want a better, brighter future’. Arguably his biggest and boldest electoral pledge was that he would create 25 million jobs over the next decade.
So why do I say that some of these policies could have a short-term positive effect? Let’s go back over them, outlining the possible gains (I’ll cover the risks and challenge some of the assumptions about to be made in connection with each of these policy proposals later in the course of the article…).
- There is little doubt that cutting corporation and income tax would in the short-term create a surge in economic activity. Whatever the potential cost, if you cut income taxes people have more expendable income; and if you cut corporation tax, there’s a greater incentive for new businesses. The think tank Tax Foundation (generally seen to be conservative, though nonpartisan) have made the following forecasts: ‘we estimate that [Trump’s] plan would boost long-run GDP, raise wages, and increase the equilibrium level of full-time equivalent jobs’. More particularly, their analysis suggests that ‘the larger economy would result in 5.4 percent higher wages and a 20.1 percent larger capital stock’.
- It’s also true that tariffs — if the immediate risks can be circumnavigated (and that’s a big “if”…) — have the potential to create jobs and lift wages. Few can deny that the cheap imports and competitive wages that come with free trade have some negative consequences (even if the net effect is by-and-large positive). For instance, a recent IMF report entitled Does Globalisation Lower Wages and Export Jobs? declares that in countries with decentralised labour economies (i.e. where labour is outsourced abroad) ‘the decline in relative demand for less-skilled labor has translated into lower relative wages for these workers’. The report also finds that advanced economies which trade with developing countries have seen ‘a 20 percent decline in the demand for labor in manufacturing, with the decline concentrated among unskilled workers’ (though the report raises doubts about whether this is a consequence of labor-saving technology). It stands to reason that a localised effect (ignoring the wider consequences) of penalising companies that export labour and impeding trade with developing countries could be that wages for low skilled workers go up.
- Creating more construction and military jobs by increasing state expenditure to as much as $500 billion would undoubtedly provide a major boost to job creation.
- As could expelling 11 million undocumented migrant workers. It would certainly leave some vacancies…
- It’s also true that deregulation usually does in the short-term generate huge amounts of wealth. It incentivises markets and businesses who exploit the absence of controls; it often results in lower prices for consumers; and regulatory bodies are expensive to run — so getting rid of them saves the taxpayer. Received wisdom suggests that for these reason and more deregulation is responsible for the boom part in the boom and bust cycle (a bit of a give away there about what the risks might be deemed to be…).
- Lastly, no-one can reasonably object to the suggestion that encouraging Amazon to pay the corporation tax it owes would have its benefits for the economy as a whole.
Ok, so those are the potential positive gains. And I will not deny it — some of them are huge. But inevitably I am about to argue that in addition to some of these plans being morally reprehensible, they come at a huge potential cost and many of them are economically-speaking deeply misguided. So let’s now outline some of the potential setbacks…
- Whilst there are potential short-term gains from cutting corporation tax and the higher end of income tax, allow me to state the obvious: these are vital means of wealth redistribution. The same conservative think tank cited above (Tax Foundation) also makes two extremely significant projections. First: the wage increases anticipated would not be evenly spread. Following these tax cuts, after-tax incomes for the wealthiest top percent could be ‘as much as 16.0 percent higher’, whilst the bottom 80% ‘would see an increase in after-tax income between 0.8 percent and 1.9 percent’. More troublingly, perhaps, the report argues that these measures ‘would reduce federal revenue by between $4.4 trillion and $5.9 trillion’. So in short, the wealth creation that would come from cutting taxes would be shared by disproportionately few, and the state mechanisms for redistributing any newly generated wealth would be close to obliterated. It’s worth re-stating that this is a projection from a conservative think tank — using a forecasting model that presents the outcome of tax cuts favourably. I could be less forgiving: tax cuts along these lines would fucking destroy America.
- As for redrafting trade deals and imposing tariffs: again, I am about to state the obvious. Tariffs are an extremely risky business. One major risk is that other countries would be very likely to retaliate by imposing tariffs on the US export market. Another is that tariffs could lead to businesses going bust if their costing models are dependent on cheap imports. Then there’s the fact that tariffs limit the horizons of any given business: so for instance Ford Motors (after Trump threatened a 35% tariff on Ford cars made in Mexico) have argued that creating manufacturing plants in Mexico has enabled more job creation in US for the obvious reason that if they can manufacture for less, business is better. This claim is vindicated by the fact that 200,000 auto-making jobs have been created in the US in the past decade — widely considered to be because of, not in spite of, the rise of manufacturing in Mexico.
It’s also worth mentioning China when on the subject of potential risks arising from tariffs. Chinese policies presented by Trump as currency manipulation (selling foreign exchange assets to keep its exchange rate artificially low — giving it an export advantage) are widely seen to have helped prop up the Yuan. If tariffs designed to prevent that from happening were effective, this would make the Yuan vulnerable. And if (worst-case scenario) the Yaun were to collapse, then that would very likely trigger another world-wide recession. One of the basic principles of free trade as an alternative to protectionism (though I am not by any means arguing that the free trade model presented in agreements such as TTIP is ideal) is that it diminishes the likelihood of such eventualities — which have the potential to harm everyone.
Finally, I want to return to the suggestion (mentioned earlier with reference to an IMF report) that free trade has resulted in lower wages for unskilled workers and a decline in demand for unskilled manufacturing jobs. In the same report, these claims are put into perspective when the wealth and job creation that also comes with free-trade are taken into account. The report concludes: ‘nearly all research finds only a modest effect of international trade on wages and income inequality.’ In other words — though wages for low skilled workers are decreased, the net effect is negligible (partly because other jobs are created). The IMF report strongly suggests that any possible gain from tariffs in terms of wages or job creation would be minimal. And of course, this is all assuming that if companies like Ford were faced with tariffs for taking manufacturing work overseas — they would decide to create equivalent jobs in the US. If this didn’t happen: job losses could well be an immediate result.
- To return to the issue of infrastructure spending: as I said, this is something I’m definitely in favour of (though of course I’d rather the jobs being created weren’t in aid of expanding the military and building a wall…). Still, the big question I’d ask is: where’s the money coming from? Trump’s theory is that cutting taxes and imposing trade tariffs would create such a surge of economic activity that the US treasury would be able to easily afford Trump’s $500 billion spending plans. The above analysis might cause you to think twice before believing this — as I’ve argued that cutting taxes will most likely just create more wealth for the wealthy, whilst the positive gains from tariffs would be minimal. But supposing the best possible outcome from both of these measures in terms of boosting the economy: still, with the tax cuts being proposed there wouldn’t be enough revenue for infrastructure spending on the scale imagined. You simply cannot halve taxes and double spending without there being some imbalance. So the question remains: where does Trump plan to get the money from?
Trump is famous for having said: ‘I’ve borrowed knowing that you can pay back with discounts. I would borrow knowing that if the economy crashed, you could make a deal.’ Now as it happens, my opinion is that if this were formulated into a coherent plan — such as ‘people’s quantitive easing’ — then it might be a viable option (crazy as that sounds). But simply amassing debt that you have openly suggested you will renege on — basically informing investors that you plan on bankrupting the state — is a risky strategy. It might work in the world of business (Trump has filed for bankruptcy four times) but it doesn’t work so well when it comes to nation states. Trump should take a look at Greece (it’s in Europe). At the very worst, by talking this way Trump runs the risk of devaluing Treasury securities, meaning that they could become a toxic investment — which would spell disaster (as in, there would be no means of funding government plans and debt would spiral).
- On the question of expelling undocumented migrants: well yes, you could argue that there would be some job vacancies. But first, it’s a little simplistic to imagine that these vacancies would simply be filled by America’s 7.9 million unemployed. Second, claims about expelling immigrants along these lines of course overlook the fact that the individuals in question contribute massively to the US economy as a whole. According to a survey conducted by the economist Giovanni Peri on the impact of undocumented migrants of the labour market: ‘In states with more undocumented immigrants, skilled workers made more money and worked more hours; the economy’s productivity grew. From 1990 to 2007, undocumented workers increased legal workers’ pay in complementary jobs by up to 10 percent.’ This suggests that removing undocumented migrants would have a long-term detrimental effect on everyone else. Of course, it’s also worth taking into account the cost of actually implementing such a policy, which is estimated to be between 400 and 600 billion dollars.
- As far as deregulation goes: does anyone really need reminding of the potential harm that a deregulated market can do? As Richard Murphy has noted, if markets are deregulated in the way that most predict Trump is intending: ‘We are heading back to the wild west days of unregulated finance: debt booms are on their way’. It is because markets were deregulated in the first place that Americans are feeling the pinch. By presenting deregulation as a solution, Trump is like a quack feeding a sick patient the very same dish that made them ill as if its some kind of miracle cure.
- Finally, on the subject of holding businesses to account by making sure that they pay their corporate tax: there would obviously be no downside to this. Except of course that under Trump’s plans the corporation tax that they would be contributing to the economy would have more than halved.
So there we have it: the long-term risks of Trump’s proposed economic policies are severe. They will without doubt increase inequality, and they suggest lots of possible avenues that could lead us into another major global recession.
There will be other likely consequences to all of this. The biggest of these is indicated by the fact that bond market traders are betting on rising interest rates and inflation. Why? Because tax cuts are very likely to result in increased consumer spending — and that will drive prices up, in turn justifying higher rates of interest. At the very least, this will mean that the cost of living will go up. More likely, as Richard Murphy speculates, it will result in ‘an inflationary boom and massive bust.’
It’s all a recipe for a total fucking disaster in other words.
And that’s before even taking into account the wider, cultural impact of Trump’s protectionism: reasserting divisions between nations, and resulting in increasingly intolerant attitude towards other cultures.
But the crucial thing to take note of is that any social unrest arising out of these issues — or from tensions created by Trump along the lines of race and gender — will be eclipsed if there is an impression that Trump’s economic policies are working.
And on top of this: the disastrous consequences that I have outlined could very well not materialise until some time after this impression of growth has been given. Meaning that America could potentially once again be conned into thinking that Donald Trump is the best thing that has ever happened to it, and into reelecting him for a second term.
To repeat: tax breaks and deregulation are likely to create a mini-boom. Tariffs and a hardline migration stance could well produce plenty of anecdotal evidence of job creation — American jobs going to American people. And infrastructure spending together with the repatriation of corporate profits would undoubtedly result in job creation and greater prosperity.
The gains could be big in other words, and they could outrun the consequences.
I’m not saying this will definitely happen. Trump has a mountain to climb to get all of this through Congress; and there are countless risks that come with what he is proposing that could well manifest themselves at an early stage. But if he is lucky, the devastation that he is intent on doing could be masked by a cloud of money and jobs.
So what is the solution?
First, conscientious Americans have to do everything within their power to prevent Trump from achieving these goals. Second, they have to make the long-term consequences of his economic policies known. And third, they have to reach out to those who voted for Trump and who have deep-rooted concerns about America’s economy — even if their decision to vote for Trump is entirely indefensible on moral grounds.
This latter objective requires a degree of pragmatism. If our disgust inhibits us from accepting the legitimacy of their concerns as far as the economy goes — then there questions could well go unanswered, Trump could win a second term, and the hostile culture threatening America’s most vulnerable would only worsen.
This means that Democrats and anyone else who is anti-Trump needs to accept that protectionism represents a dissatisfaction with economic liberalism that is fully justified (even if its solutions are by turn misguided and reprehensible).
To my mind, it is right that many Americans should object to being undercut by people in other countries willing to work for less without there being adequate support mechanisms; it’s right that they should demand job creation through government initiatives; it’s reasonable that they should have anxieties about migration given that wages have stagnated and employment is so precarious; and it’s right that they should be pissed off at corporations that don’t pay their taxes.
It may not excuse what they have done by consenting to Donald Trump’s politics of division, but the ire of the American people is warranted. Economic liberalism has failed them. It has put economic growth before the interests of everyone — and that is the primary cause of the wage stagnation, precarious forms of employment and rising inequality that Trump voters are referring to when they express their anxieties about America’s broken economy.
Clearly, there is a need for intervention. The problem is that the kind of intervention being proposed is wrongheaded and reckless.
What is actually needed is for corporations to be held to account and adequately taxed; for national industry to be encouraged through government-led initiatives; for increased infrastructure spending that has fiscal support; and for more decisive government action in terms of wealth redistribution.
In Hillary Clinton the Democrats failed to find a candidate willing to defend these principles loudly enough and with conviction. Consequently she proved incapable of convincing a sufficient proportion of the electorate that she was committed to fixing their problems.
Would Bernie Sanders have been any different?
It’s maybe worth remembering the fact that during the primaries Sanders had over a 10 point lead on Trump, significantly greater than Hillary Clinton’s. And it’s also worth noting the findings of a recently conducted poll which concluded that Sanders share of the popular vote would have been 56% next to Trump’s 44%.
Let’s not forget in the years to come that though the American electorate voted for Trump, they are amenable to ideas that have the capacity to improve, rather than destroy, their economy. That should give opponents of Trump the strength to present a feasible radical alternative.
Whatever happens in the next four years, the most likely eventuality is that it will be Trump’s success with the economy that determines whether he wins a second term in office. He will have to be responsible for a real disaster (by no means impossible) for it to be otherwise.
If Trump succeeds in uniting Republicans and getting all of his proposed measures through Congress; if these measures don’t trigger a recession in the immediate future; and if inflation, rising poverty levels and rising inequality are a slow build — then the policies Trump is proposing could very well spell a brief period of seemingly uncomplicated and well-deserved prosperity.
A bit like enjoying a five-week blow out in McDonalds having sold all the family silver. The kids will love it, until they come to reckon with the cost. The challenge is to try and make sure that this realisation doesn’t come too late.