By Linda Yueh
Trumpism is defined as: (1) the rejection of the current political establishment and the vigorous pursuit of American national interests; (2) a controversial or outrageous statement attributed to Donald Trump.
On winning the US Presidential election, his victory speech confirmed that he would put America first in his policies. That pursuit of America’s interests will permeate US economic and other policies in the years to come.
His effect on the economy is hard to discern due to a lack of policy detail, but there are three main areas to watch: fiscal, monetary, and foreign including trade policy. In each area, there is potential for significant change. But, as with all public policies, there will be a trade-off that is yet to be dissected. For instance, he’s vowed to double America’s growth rate, critiqued the Fed, and expressed protectionist views. How will he achieve those aims? And at what cost?
Firstly, America’s economic growth has been slower than before the 2008 financial crisis. There are underlying trends that have led economists to debate whether the US, and other advanced economies, are facing “secular stagnation”. It’s a term first coined by Alvin Hansen in the 1930’s and recently revived by Larry Summers, which captures the notion that America may face a slower growth future.
Trumpism’s first aim will be to raise economic growth, and the policy to be deployed to achieve that goal is to cut taxes and reduce regulation. But would that square with his desire to reduce America’s debt? The independent Tax Policy Centre, jointly set up by the Brookings Institution and the Urban Institute, estimates Trump’s plan will double the growth in federal debt.
Will Trump be able to justify that trade-off in his fiscal policy? Of course, his plan to cut business taxes from 35% (which is among the highest in the OECD) to 15% (which would be among the lowest), as well incentives to increase investment, may be welcomed by businesses who voted him into office.
The Tax Policy Centre also concludes that Trump’s plan would actually increase and not decrease the tax burden on middle class Americans, while cutting taxes for the better-off and corporations. Given the stagnant median wages that have squeezed the middle class, economic growth that does not raise incomes for the average American is less than desirable. The American consumer also drives the global economy, so there are wider implications.
Second, and perhaps one that’s important for markets is what happens to the Fed. Trump has criticised the Chair of the US central bank, Janet Yellen, for acting in a politicised manner. It has led to concerns over the independence of the Federal Reserve as well as whether Yellen will remain in post until February 2018.
That adds prolonged uncertainty on top the near-term economic uncertainty caused by the scant details of Trump’s economic plans. The dramatic market movements where the US benchmark stock index, S&P futures, fell so far it hit its bottom limit, as well as the plunge in the value of the dollar reflected the concerns of investors. Indeed, markets have downgraded the prospect of an interest rate rise next month to 50-50.
But the most significant market movements were seen in emerging markets; notably Asian stock markets and the Mexican peso give an indicator of how emerging economy currencies were unsettled by Trump’s foreign and particularly trade policy.
Trump has said that he will revisit trade policy, including withdrawing from NAFTA if the agreement doesn’t benefit America, consistent with his philosophy of putting America first. This is an area where the President has the unilateral power to re-negotiate and even withdraw from trade agreements – congressional approval is needed to enter into free trade agreements (FTAs), but is not required to pull out. The same goes for the imposition of some tariffs, which President George W. Bush did on steel, until he was pulled back by the World Trade Organisation.
In a world economy that it already experiencing weak trade growth, a more protectionist US president is certainly worrying for the rest of the world, many of whom rely on selling to the vast American market. For Asian economies in particular, growth depends a great deal on exports, including to the US.
The immediate reaction to Trump’s surprise victory – polls predicted a Hillary Clinton win when the voting began – was a dramatic fall in global markets, which reflected this surprise but also an underlying concern about where America is headed. Those market declines were moderated as the news sank in.
But what happens next will depend on the policy specifics around Trumpism.
Until we get more detail, there will be economic uncertainty about America, and by extension, the global economy. And that tends to be unsettling.
Linda Yueh is a Fellow in Economics at St Edmund Hall, University of Oxford. Her blog originally appeared on the OUP website.