If Donald Trump gets his way, America will shortly embark on a bold economic experiment: Trumponomics. Mark Berrisford-Smith, head of economics at HSBC UK commercial banking, explains a counter intuitive philosophy
Trumponomics boils down to a combination of fiscal activism, trade protectionism and restrictions on immigration.
Growth is likely to be stronger in the short term, but there are considerable risks, not just to the USA but the global economy.
President-elect Trump wants to try something that would have been anathema to any self-respecting Republican before he won his surprise victory. He wants to increase spending by the Federal government, especially on the nation’s creaking infrastructure and its defence, while at the same time delivering substantial tax cuts to individuals and businesses.
In the long-running debate about the merits, or otherwise, of austerity, some have argued for higher public spending, while others have championed tax cuts; but nobody has argued that both could be done simultaneously.
Many Republican congressmen and senators have spent six years thwarting the spending proposals put forward by President Obama and the Democrats. It therefore remains open to question how willing they will be to open the coffers for Trump.
It’s therefore likely to be well into next year before any significant tax and spending proposals are passed by Congress, so therefore HSBC’s forecast for GDP growth has been nudged up only slightly, from 2.1 percent to 2.3 percent.
A more substantive acceleration is then expected in 2018, by which time the impact of tax cuts will be feeding through to households’ disposable incomes, and to investment and hiring by businesses. The proposed infrastructure boost will also by then be making a tangible difference to government investment spending and to employment.
The forecast for GDP growth has therefore been raised from 2.3 percent to 2.8 percent, which if realised would be the fastest rate of expansion achieved since 2005.
Getting the sums to add up
The big question, of course, is how all this will be paid for. Trump and his advisers believe that infrastructure and defence spending can be ramped up, and taxes cut, with only a minor impact on the budget deficit. The plans of the new administration remain hazy, but they seem to be pinning their hopes on being able to make savings in government spending in non-investment areas, and are also counting on tax cuts delivering faster growth and hence stronger revenues.
Yet even if a new approach to modelling turns out to offer a better approximation of real world conditions than the traditional models, it remains questionable whether the United States can achieve the sort of growth rates that Trump and his advisers touted when they unveiled their economic plans in September.
They offered a vision of reduced corporate and personal taxation, deregulation, investment in infrastructure, and a renegotiation of trading arrangements to lift the economy’s growth rate to more than 3.5 percent a year. The United States hasn’t achieved that sort of growth since the ‘Goldilocks’ years of the tech boom in the late 1990s.
These days, achieving such growth is rendered harder by the dampening effects of an ageing population, the march of new technologies threatening to replace more jobs with machines, and greater competition from lower-cost producers.
With Trump’s policies likely to deliver a boost to growth in the short term, it’s also probable it will nudge the rate of consumer price inflation closer to the target.
Who will laugh last?
The most obvious risk to Trumponomics is that the sums won’t add up, with a widening of the budget deficit triggering a rout in the bond market.
And even if President Trump succeeds in boosting America’s rate of economic growth, the benefit to the global economy could be offset if he follows through with proposals to restrict cross-border trade.
One thing that can be safely said is that if Trumponomics works it will be a massive defeat for mainstream economic thinking.
If generating faster growth through improved productivity turns out to be so easy, voters the world over will rightly ask why no other politicians had the will or wit to do it sooner.