The Trump Phenomenon

 

WEEKLY COMMENT 17-11-2016

By Barry Edwards

The Trump Phenomenon

 

Every article or comment about the world economy since the election of Donald Trump predicts a mixture of positive, negative and no change future for the USA and the world with the negative view just dominating the mix. Those who believe there will not be much change base their arguments on the fact that Congress will water down any proposals for big increases in expenditure that are presented to them and refuse to pass anything outrageous. Where the President has much more control over foreign policy and defence, they have confidence that the people who eventually advise and work closely with him will tame any exuberance.

This may well be the case and to some extent is very likely; however, the nature of the man and his undiplomatic style will permeate the media creating lively discussion which will be of concern to many world leaders. At this stage no one really knows how his governance will play out but we can look at the positive and negative aspects of his rhetoric during the campaign and predict how those policies might affect the world economy.

Taking the positive approach first, we can expect the substantial infrastructure investment he proposes to increase American economic growth by at least 1% and may be more although it does take time to implement this kind of investment for the affects to fully apply. Most economists have been suggesting that this policy should be adopted and for many it should have been done after the financial crisis. He also proposes a corporation tax reduction which is currently 35% to prevent the practice of companies domiciling their tax base abroad and encourage capital expenditure. Many commentators believe he would like to eventually achieve a rate of 15% similar to UK ambitions.  Also he is proposing a one off tax charge of 10% for big corporations to repatriate funds held abroad which could also stimulate corporate investment in the process.

The big debate is about how all this is funded; there are various ideas which include issuing treasury bonds, creating a new infrastructure bank similar to Fannie Mae and Freddie Mac the mortgage funders. When you consider the revenue generation side of the equation; more tax revenue from the investment, the one off 10% charge and the extra revenue from the increased growth rate. Many economists believe there will still be a deficit which some predict could increase the budget deficit by $4,500 billion. This is where his plans could clash with Congress who has to authorise that sizeable issuance of treasury bonds but if he establishes the infrastructure bank this would get round that problem although creating the bank would require congressional approval.

Therefore, we have on the positive side a big leap in the growth rate of the US economy and employment which would increase tax revenue that may balance out the expenditure over time although in the medium term a deficit will occur. For some this approach is very positive and will transform the American economy into the most successful in the world. Many believe Europe should do exactly the same thing and then the world economy will flourish once again.

Looking at the negative side of the argument; the main problem is the executive powers that are the prerogative of the US President in foreign policy and defence. The diplomats believe having an inexperienced politician in the White House could cause big problems in a very sensitive world where negotiations must be conducted in a controlled manner to keep the balance of power around the world in check. They are nervous that the new President could create circumstances which they cannot manage causing disruption to this balance and consequently making the political world more unpredictable possibly leading to more conflict in unexpected places.

In my view this is very pessimistic and could only happen if the team surrounding him were not experienced diplomatically at all which is very unlikely. The other main worry is that his election will encourage populist parties which may gain more power and possibly become the government in some countries. The concern is concentrated on Europe and further disruption in the EU could be a real problem for the balance of world power. For the diplomats, having an inexperienced politician in the White House at this time is not a good thing.

Despite all the negative views from the diplomats and some economists, the economies of the USA, the UK and some parts of the EU are doing quite well and growing more than many predicted. The markets have reacted very positively in developed countries after an initial blip although emerging markets have taken a hit mainly due to the potential increase in interest rates and inflation. At the moment the surprise of Brexit and the election of Donald Trump have not been the disaster that was predicted by many commentators and politicians.

This is a very brief summary of the impact of these events and there are many other aspects which will influence the world economy. However, overall in my view the positive side of the debate is more likely to be the outcome in the medium term but it could be disrupted by events especially if the Middle East flairs up and impacts on Europe. The surprise of Brexit and Trump may turn out to be events that change the course of History.

That’s all for this week, more observations next week.