Friday, February 26, 2016

Will Trumponomics be Reaganomics Mark II?

If Trump is elected president, his economic policies will either
(1) crash America or continue its economic stagnation, and accelerate its catastrophic decline under neoliberalism (because Trump will impose an extreme form of neoliberalism, albeit maybe with some trade or labour protectionism) or

(2) turn America around and actually impose big Keynesian stimulus, and trade and labour market protectionism.
(2) will make Trumponomics nothing more than Reaganomics Mark II.

Why? We know why. It’s the dirty little secret about Reagan: Reagan was a big spending Keynesian, albeit a military Keynesian. He was also a protectionist who imposed tariffs and non-tariff barriers to protect American manufacturing, primarily against the Japanese.

If we turn to Trump, his economic policies are frustratingly murky. And then there is the question of his credibility. He poses as a populist, and perhaps is just saying whatever he needs to say to win votes. Moreover, if he gets into office, it may well be back to business as usual: more neoliberal poison.

One of Trump’s major economic policy proposals is a plan for tax cuts. The tax cut plan is shamelessly regressive, with tax cuts on the wealthy and big business, although there are some cuts for the middle and working classes. But remember: this is just a like Reagan’s supply-side economics! The supply-siders pushed through a regressive plan of tax cuts, and once the Reagan administration abandoned Paul Volcker’s disastrous experiment with monetarism, Reagan pushed through big discretionary spending increases, which drove the budget into deep deficits (here and here).

The million dollar question: what will Trump’s fiscal policy be? Could it be that when he gets into office he will cut taxes but massively increase government spending, perhaps justifying the increases as military spending or rebuilding America’s infrastructure? He would then crush all opposition by smearing his opponents as unpatriotic haters of America and betrayers of the military.

The second element of Trump’s proposals relevant to economics is his immigration policy. Trump wants to do what very few establishment Republicans and no Democrat would ever do: build a huge wall and seal off the border with Mexico and deport illegal migrants. Tons of illegal immigrants.

The fact that Trump wants a huge wall and deportation of illegal aliens, possibly in the millions, will actually help American workers at the bottom of society if he managed to implement these things (though that is uncertain), because it will impose a new degree of labour market protectionism, even ultra-protectionism for workers. You think that won’t be popular? Well, corporate America is screaming with horror at this plan because they understand well what it means: that businesses must raise wages to attract domestic workers.

Trust me, your average American Joe will positively love President Trump if he does this and combined with large fiscal stimulus, because too many lower-class Americans suffer from having to compete with illegal immigrants for very low wages.

Real wages under President Trump might rise too. Democrats claim to be in favour of the working class, but none of them would have the balls to do what Trump is advocating in terms of labour market protectionism. For example, Bernie Sanders says he is vehemently against open borders, but what could he ever realistically do to stop the flow of illegal immigrants? Sanders shuns any kind of mass deportations. He’s too nice and too compassionate a man.

The third point: Trump seems to want a large degree of trade protectionism by confronting the aggressive mercantilist China and changing free trade deals. In the video below, he says something quite stunning: despite his (amusing) protestations to the contrary, possibly there is no free trade agreement that the US has signed he can think of that he likes. None. That is a brutal rejection of the mainstream US political orthodoxy on free trade. Only Bernie Sanders is this hostile to free trade.

Bernie Sanders and Trump also seem to agree on the need to put an end to the unfair trade practices of China, e.g., the de facto protectionism by undervaluing of the Chinese currency, and the off-shoring of US jobs.

Trump may well drive a huge steamroller right over the World Trade Organisation and tear up various free trade agreements. That will be bad for other countries but good for America in the long run because it will tend to encourage re-shoring and rebuilding of American manufacturing.

So again, to return to the million dollar question: will a President Trump crash the economy or turn out to be a huge deficit-spending Keynesian?

In the latter case, Trump has the capacity to be – let’s be honest – a hero president who appeals to a lot of angry working and middle class voters, if he does not succumb to austerity and budget balancing. His America-first economic nationalism might bring back some manufacturing jobs. A wall with Mexico and huge deportations of illegal immigrants will actually help the job prospects of unskilled and semi-skilled US workers.

If he is really smart, Trump will crush all opposition, cut taxes, but then ram through a huge increase in discretionary spending and run huge deficits, so that he will preside over Reaganomics Mark II.


  1. One thing, though.

    Wouldn't an expansionary fiscal policy work against the goal of protecting America's trade position?

    I mean

    Government spends more money


    Interest rates go up


    Foreign investment into America increases

    -> That results in more goods bought by Americans from abroad

    The general public will not see this, but it is a likely outcome of such a policy.

    1. its depends on the devaluation of the dollar to interest rate ratio.

      if it will be healthy (which is not currently) then your scenario is less likely to happen.

    2. Imports are a real benefit. Nobody cares about imports as long as everybody is gainfully employed domestically at a decent wage.

    3. Neil Wilson,

      This MMT idea (or at least this idea shared by some MMTers) that imports are only ever a benefit is badly mistaken. MMT works for the US or Western Europe or Australia or Japan or South Korea or Taiwan, but not for much of the Third World.

      That is, MMT-style policies are best suited for advanced capitalist nations, not necessarily for Third world countries, because most of them face severe balance of payments constraints. What is needed for the Third World is **development economics**: a huge stream of imports only cripple the development of a domestic manufacturing sector, just as in the 19th century our Western civilisation smashed up so much of the Third world by free trade and the de-industrialisation caused by pushing our manufacturing exports on them.

      Also, domestic production matters a lot. Self-sufficiency is a good ting in many commodities, e.g., food and agriculture and primary industries. Energy independence matters a lot.

      Exports matter a lot for many countries. Because exports bring in foreign exchange if you can't attract foreign exchange via the capital account (that is, mostly people bringing in foreign exchange to buy your domestic financial and real assets).

      Finally, manufacturing matters -- a lot. You can't be a really great power and maintain great wealth and an advanced modern economy without manufacturing. The US -- despite what some people think -- needs to remain a manufacturing colossus to remain a great power, and to be politically independent. This is something, I think, both Trump and Sanders understand.

      Otherwise, any large enough trading power can start a trade war and cripple you by cutting off imports. Self-sufficiency in at least a lot of commodities and a huge manufacturing sector translates into national power. You need national power to exist in a hostile world, to make credible trade deals, and to make sure you are not the victim of aggressive, bullying policies by other national powers.

      If you think imports are only a benefit, look at the devastating de-industrialisation of large parts of the Western world, e.g., in the US, look at the hollowed out inner cities, devastated crime-ridden communities, the de-skilled, long term unemployed workers, and the collapse of all the related industries that rely on manufacturing.

  2. Confucius say, useless read tea leaves in coffee cup.

  3. Trump's fiscal policy is going to be HUGE. It will dwarf the Reagan deficits significantly. Over the next decade it would cost 10 trillion dollars.

    Some estimate it could cost more (12 trillion).

    At the same time he hasn't said anything about serious cuts. As of 2015 the federal governments still spends the bulk of its budget on 5 things; social security, medicare, medicaid, the military and interest on the debt.

    He wants to grow our way out of any problems with social security and medicare. So no cuts there.

    He is a supporter of Medicaid and is fairly liberal on spending to help the poor in regards to health insurance. That means no real change in spending or spending projections.

    He wants to update and modernize the military. So, thats a likely expansion.

    There isn't much you can do about interest payments. Overall, Trump wants a massive tax cut for personal incomes and corporations, not necessarily bad ideas, but he also wants to spend big on our biggest programs.

    He has also talked about revamping infrastructure. Airports, highways, bridges and his wall will cost a lot, although no good estimates yet exist. His wall could cost billions, but again, e really don't know.

    Trump is also spreading fear about the 19 trillion dollar debt so he's going to have to sell off every bit of federal land, privatize all federal corporations, and cut just about everything else to even start to pay for this.

    1. Good points. But I imagine the depth of his tax cuts and spending increases will be moderated by Congress.

    2. "There isn't much you can do about interest payments. "

      QE4 to buy back a crap load of debt and to keep yields down? lol

    3. "Trump is also spreading fear about the 19 trillion dollar debt so he's going to have to sell off every bit of federal land, privatize all federal corporations, and cut just about everything else to even start to pay for this."

      Can't believe this myth about 'paying for things' still does the rounds.

      Government 'pays for things' by spending the money. Spending the money creates the same amount of taxes and additional savings as a matter of accounting.

      If he's smart he'll stop China being able to own Treasuries and create one of those platinum coins.