Op Ed:Trump’s economics bad for US and global economies

14 Nov 2016

President Bill Clinton coined the phrase ‘It’s the economy, stupid’. For President-Elect Trump it’s more a case of stupid economics. 

President-Elect Trump does not have an economic plan that can bring the US economy to the rates of growth of 4% or more that he promises. In fact, his lack of a coherent plan, and perhaps more importantly the lack of qualified, experienced people around him to develop and implement a coherent plan, threatens the US economy with a return to recession. This is bad news for the US and bad news for the global economy.

The US economy is recovering from the worst depression since the early 1930s, notably a depression that was also succeeded by a rise in populist demagogues. President-Elect Trump said his economic policy could be summed up in three words, jobs, jobs, and jobs. Based on the performance of the US economy since 2010 then he should simply keep doing what President Obama has been doing, since approximately 14 million more workers are in full-time employment in the US now compared to 2010. President Trump is unlikely to do that.

President Trump’s #economics could be bad news for the US and global economies, suggests @UCC's Dr Declan Jordan https://t.co/Sx8vc5Hftr pic.twitter.com/TWS8uHano7

— Irish Examiner (@irishexaminer) November 10, 2016

President-Elect Trump’s main economic ideas include a tax cut for top income earners (like himself), a cut in corporation tax to 15%, an infrastructure investment programme, a return to protectionist trade policies, and the removal of excessive regulation on business. All this will be achieved while reducing the budget deficit. These ideas, they are too vague to be considered policies, are not just wrong for the US now, they are inconsistent with each other.

There is no evidence to suggest that cuts in income tax for top earners will stimulate economic growth, these earners tend to invest their money rather than spend it. The funding for a large infrastructure investment cannot be achieved without an increase in the deficit and the level of borrowing. The US rate of unemployment is 4.9% - a dramatic decline from around 10% in late 2009 at the height of the recession. This means the US economy is about 1% away from the traditional level of full employment. An infrastructure stimulus at this time, in the absence of a dramatic rise in immigration to bolster the workforce, will result in a rise in wage costs in all sectors and significant rises in inflation.

#TrumpPresident ’s economic policies are bad news for the US and global economies says @decjordan. Hear more @cooper_m @lstwrd today, 5.05pm pic.twitter.com/1clEmDO05t

— UCC Ireland (@UCC) November 11, 2016

This rise in prices will be exacerbated by an increase in the costs of goods and services due to import levies, or the substitution of cheaper foreign goods with more expensive domestically produced goods. There will be jobs lost in some sectors that rely on exports as US trade partners respond by levying their own duties on US goods and services. The result will be an economy propped-up by a state-funded infrastructure programme with lower manufacturing employment.

The reduction in corporation tax to 15% will worsen the deficit, and is unlikely to lead to the promised return of foreign-based operations of US multinationals. While it sounds vaguely reasonable, it ignores the manner in which multinationals avoid taxation. In Ireland we are especially worried about this proposal, as we fear it will undermine our taxation advantage. It doesn’t, and when we consider that large multinationals have effective taxation rates much lower than the nominal 12.5% it’s hard to see how it would. US multinationals will continue to benefit from differences in taxation regulations which are far more important for their tax avoidance schemes than tax rates, and so will retain overseas operations.

The Trump movement was based on worries about globalisation. This was one of many sleights of hand by the candidate. There are no economic policies that have only benefits, all involve trade-offs between costs and benefits. The period of more rapid globalisation has coincided with a decline in global income inequality. Average incomes in poorer countries are converging on those in richer countries. This is probably due to economic development in poorer countries arising from greater trade.

At the same time there has been substantial increases in income and wealth inequality within richer countries. And the US is one of the worst performers for income inequality. This is the problem that middle class voters in the US should be concerned about. The prescription for this is not a reduction in global trade but higher taxes on wealth and redistributive policies, not lower taxes as promised by President-Elect Trump. By blaming globalisation and immigration for a worsening economy, which is in reality improving, the Trump supporters were hoodwinked into focusing on the wrong problems and solutions.

President-Elect Trump’s success is worrying for the US and global economy. It became an article of faith among his supporters that because he is a successful businessman, though that is even questionable, he will make a successful President. This assumes that the abilities to run a successful business and the same as those to run a successful country. This is just nonsense. An economy is not a society, and a political leader needs to devote as much time to ensuring society functions as well as an economy does. For leaders, care, empathy, and values are as important as technical abilities. A business man (and they usually are men) can increase profits by treating workers poorly and he will lauded by his shareholders. A President that sacrifices social cohesion and concern for all citizens to build an economy destroys a society. 

Dr Declan Jordan is a senior lecturer in the School of Economics. Declan's research interests include innovation, regional development and competitiveness, innovation and enterprise policy, and sports economics.

Interested in a learning more about economics at UCC? Visit https://www.cubsucc.com/programmes/economics/

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