In Managing the U.S. Economy, Trump Must Pay Heed to Brexit
“And seeing ignorance is the curse of God,
Knowledge the wing wherewith we fly to heaven.”
William Shakespeare, “Henry VI,” Part Two
When it comes to Brexit (Britain’s looming exit from the European Union), President-Elect Donald Trump should bear Shakespeare’s observation in mind.
While Trump relishes in the populist success of Brexit figurehead, Nigel Farage, he should be cautious. Because whatever Brexit’s merits for national sovereignty, our new knowledge of its economic consequences also deserve attention. They offer lessons as to how structural changes affect a modern western economy. As Trump seeks to reform the U.S. economy, Brexit offers three key lessons he should not ignore.
Lesson 1: Private Sector Confidence Is Vital
Like the British economy, the U.S. economy is primarily defined by the interactions of private interests and market forces. And Brexit is showing just how vulnerable those interactions can be.
Consider what happened last week, when British Prime Minister Theresa May spoke to Britain’s main business lobby. May’s mission was to quell doubts about her plan for leaving the European Union. Business leaders wanted May to tell them whether they should expect continued trading access to the EU. May gave few answers.
Naturally, British businesses are increasingly concerned. Ignorant of their future marketplace, they are unwilling to make investment decisions. And those investments are crucial for Britain’s medium to long-term prosperity.
The UK’s Office of Budget Responsibility (equivalent of the U.S. Congressional Budget Office) reported last week that British “GDP growth will continue to slow into next year as uncertainty leads firms to delay investment and as consumers are squeezed by higher import prices, thanks to the fall in the pound.” The OBR explains, “A weaker outlook for investment and therefore productivity growth is the main cause.”
Some are criticizing the OBR’s findings as overly pessimistic, but others, such as Morgan Stanley’s U.K. analysis team, for example, believes the OBR is overly optimistic!
The simple lesson for Trump: on entering office, he should quickly outline his economic reforms. The sooner businesses understand how Trump will deal with issues such as work visas, repatriation of capital, tax reform and regulations, the better. The sooner businesses gain that confidence, the sooner they will do what has always made the U.S. economy so strong. They will continue to take calculated risks and invest in pursuit of profit.
The sooner businesses understand how Trump will deal with economic issues, the better
The stock market reaction to Trump’s victory offers anecdotal support for this view. When Trump was first elected, the markets slumped. But when Trump offered prudent calls for stability, the markets quickly recovered, and since have reached record highs. Trump’s contradictory opinions on issues cannot hold true when he enters the Oval Office.
Lesson 2: A Plan Is Worthless If Not Implemented
The extension to a clear plan is that government should act quickly in its implementation. Brexit offers another lesson, in a slightly different way. When “leave” prevailed in the Brexit vote earlier this summer, the first casualty was British Prime Minister David Cameron. Cameron had supported remaining in the European Union and when his efforts failed, he resigned.
His plan went with him.
But when Theresa May succeeded Cameron at 10 Downing Street, she failed to quickly stamp her authority. Instead, since the summer, May has wavered between sticking to Cameron’s legislative agenda and introducing her own. This has fostered doubts in her leadership and in the credibility of her government. The most obvious example of this failing came last week, when May released a government budget that abandoned some of the spending cuts introduced by Cameron but kept others. The result of this dithering: Britons don’t know what to expect from their government. And with hard Brexit negotiations yet to come, that means needless uncertainty for the economy.
Trump can avoid this mistake. With Republican majorities in Congress, Trump should use his legislative potential to work quickly on big reforms. Three priorities stand out. First, Trump should reform the U.S. corporate taxes by reducing rates and eliminate most deductions. That would give a durable boost to hiring and investment.
Second, alongside major regulatory reform, Trump should invest in a long-term skills-based training program to help U.S. workers become more competitive. Trump has a unique opportunity to boost trade-based employment and challenge the societal bigotry that has been long attached to those positions.
Third, Trump should pursue entitlement reform. That would offer a big boost to investor confidence by securing America’s long-term fiscal credibility.
With Republican majorities in Congress, Trump should use his legislative potential to work quickly on big reforms
Trump’s agenda will obviously include issues such as immigration and health care, but he should start with the aforementioned three.
Lesson 3: An Economy Needs International Investment
Since the Brexit vote, some international investors have hedged on British business deals. Watch any major political talk show and you’ll see government ministers anxiously defending Britain’s long term investment picture. But while the U.S. doesn’t face a “USexit,” Trump’s aggressive rhetoric on foreign trade could hurt the U.S. economy in a similar way.
First, a caveat. While I disagree with Trump’s position on free trade, I respect that he won the election in large part because of that position. I have little doubt that Mexico and China are in for a rougher ride in the years ahead. We shall see whether American families share in that suffering. But the real issue is Brexit’s lesson for foreign investment. After all, if Trump acts erratically with major U.S. trading partners, he’ll deter investors in those nations from making major inputs into the U.S. economy. Even if only a few investors are deterred, that loss may quickly stack up to tens of billions of dollars.
Countering this risk, Trump should appoint a respected secretary of state to join his commerce secretary. Trump should also articulate why he wants foreigners to invest in the U.S. economy. There’s a real opportunity here. If Trump can reduce regulations alongside a welcoming message to foreign businesses, he can lure a new influx of foreign capital.
Ultimately, only time will tell whether Brexit serves Britain’s economic interest. The same is true of Trump and the U.S. economy. But with prudent attention to the Brexit experience, Trump can get his administration — and the nation’s economy — off to a strong start.
Tom Rogan writes for National Review Online and Opportunity Lives. He is a panelist on The McLaughlin Group and a senior fellow at the Steamboat Institute. He tweets @TomRtweets. His homepage is http://www.tomroganthinks.com.
