The dust is settling, and the markets have had time to adjust to the reality of the next US President. But as the analysts begin to get their heads around the implications of President Trump, it becomes clear that there is a good and bad side of Trumponimics, but another side that is downright ugly.
The Good
The good side of Trumponomics boils down to Mr Trump’s promise to create four per cent a year growth for the US economy.
Can this be achieved?
The answer is yes, maybe, but for two different reasons.
The first reason why the answer maybe yes, is that technology could be close to making this happen, regardless of who the President is.
One of the big mysteries puzzling technology believers relates to why it hasn’t had a much bigger impact on the economy already. The economist, Robert Gordon, says that we over-estimate the significance of recent technological innovations and that in recent years new technology has had limited impact on the economy. He may or may not be right, but there has to be a chance that technologies such as the Internet of Things, or robotics, or big data, are set to have a very positive effect on the economy.
The second reason is that the Trump policies, assuming Congress allows him to carry them out, will have radical effects in the short term and probably in a positive way.
He plans to cut taxes – slashing US corporate tax to 15 per cent, from the current rate, which varies depending on the levels of profits, but averages around 35 per cent. He also plans to impose a 10 per cent tax on profits made offshore. He also wants to change the way investment is treated for tax purposes so that companies can offset investment against earnings in the year they make the investment.
There is a very real practical problem with these plans – it takes time, even with a favourable Congress, for tax changes to be implemented.
These policies may lead to money held offshore being repatriated – this may lead to higher dividends or higher investment in the US, or both.
In parallel with this, Mr Trump wants to introduce a massive $1 trillion public investment infrastructure programme. This is a policy that Jeremy Corbyn might approve of.
This programme may or may not get approved by Congress – If Obama were to propose an identical policy it would surely be rejected, but a Republican-dominated Congress will always love tax cuts, and maybe that is the deal with Trump; he gives Congress what they want, they give him what he wants. Besides, an awful lot of Congressmen and women owe their jobs to Mr Trump. Rejecting his plans may not go down so well.
Mr Trump also wants to reduce regulation, especially aimed at banks and restrictions on oil companies – he is most certainly pro-fracking, but along with those who believe the earth is flat, is a climate change cynic, meaning his policies will support the fossil fuel business.
The Bad
The bad side to Trumponomics comes in two forms.
For one thing, his tax cuts do seem to be geared towards helping the rich – an odd consequence of policies that are supposedly anti-elitism.
And let’s say he tried to balance the books – to fund the tax cuts and infrastructure investment, he cuts elsewhere. Those tax cuts may well hit the poorest in US society.
For another thing, it may not be affordable.
George Bush junior cut taxes and the result was an increase in US public debt.
Tax cuts in parallel with $1 trillion infrastructure investment may well lead to massive US public debt, which may lead to inflation and much higher interest rates.
At the moment, the consensus is that we need higher inflation – but the lesson of the early 1970s is that massive government borrowing can create runaway inflation. This happened in the UK and the US in the early 1970s and the result was not pretty.
Indeed, the UK government under Ted Heath pursued a similar idea – and it ended in the winter of discontent, the UK having to ask the IMF for help, and then the rise of Thatcher.
The Ugly
But the big problem with Trumponomics relates to the international repercussions.
For one thing, if the US cuts corporate tax, others will follow. One might ask whether cuts in corporation tax worldwide is a good thing when global profits to global GDP are so exceptionally high.
But it is the rhetoric of protectionism and an anti-climate change agenda that leads to things starting to look ugly.
We know that international trade promotes wealth creation. It also promotes friendlier relations between countries.
If we are set to enter an era of protectionism, then global GDP will be adversely effected and trade wars between major economies can lead to something far worse.
As for climate change, well the implications of Trumponomics are obvious.
During the 1930s the elite got the blame for the world’s ills and we saw protectionism across the world but starting in the US with the Smoot–Hawley Tariff Act, which imposed tariffs on 20,000 goods imported into the US.
The 1930s was an ugly decade and ended with a world war.
And the similarities between the rhetoric and the protectionist ideas that Trumponomics seem to imply are most certainly ugly.
