Analyzing Trumponomics

Now that President Trump has delivered on campaign promises, what will be the impact on the economy?
June 27, 2018 Updated: August 9, 2018

President Donald Trump’s economic policies have confounded economists and angered many, even within the Republican Party. His protectionist rhetoric has alienated allies, and his tax legislation has been the subject of withering criticism. Yet, 18 months into his administration, the United States enjoys low unemployment and strong economic growth. The disaster many predicted has not materialized.

Of course, if one were to analyze the policies of Trump without the bias and alarmism of the mainstream media, one would have caught the nuances, as did the analysts working for Geopolitical Intelligence Services (GIS) in their coverage of the Trump administration. It’s also important to point out that unlike most politicians, Trump has actually delivered on most of his campaign promises.

And although the effect of many policies will only hit the economy with a long delay, one and a half years into the Trump presidency and a few months before the mid-term elections, it’s time to make a coolheaded assessment.

Positive on Balance

The Trump administration’s economic policies have received plenty of criticism. However, in April 2017, GIS founder Prince Michael of Liechtenstein urged taking a coolheaded, balanced view of the administration’s proposals, and concluded that Trumponomics deserves a second look.

“The public perception of President Donald Trump’s economic program is that it is a chaotic mix of protectionist measures, tax relief for rich people, uncoordinated increases in infrastructure spending, and antisocial cuts in health-care benefits,” he wrote. “The biggest public focus is now on claims of protectionism. But the mantra of the present administration is not against free trade per se, but against the unfair practices of some U.S. trading partners.”

He pointed out that previous presidents criticized unfair Chinese trade practices and that trade agreements like the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) had many protectionist measures embedded in them.

Reducing corporate taxes, slashing regulatory costs, and encouraging investment are all worthy goals of the Trump administration and a refreshing change from previous administrations’ policies, Prince Michael wrote.

“The success of any economic program depends on its implementation. Since economics is not a precise science, there will be unintended consequences, both good and bad,” Prince Michael noted. “Viewed in this light, there are grounds for optimism about the economic effects of Donald Trump’s presidency.”

Trade Wars?

Protectionism loomed large in Trump’s rhetoric on the campaign trail, and as he took office, some analysts even suggested the world was headed toward trade wars. Indeed, global trade has slowed, and leaders around the world were threatening to erect more barriers. But to blame this trend on Trump was a false narrative, GIS expert Enrico Colombatto said. “International trade stalled and declined well before Mr. Trump took office. … Blaming the current American administration is easy, but simplistic,” he wrote.

Colombatto concluded that the outlook for globalization is “far from hopeless.”

“Progress on lifting barriers to trade and capital may perhaps slow or even stall in the face of geopolitical turmoil. … Yet the global economy is expanding at a significant rate,” he said. “The better off the world is, the more difficult it will be to kill off the source of its prosperity”—that is, robust international trade.

Of course, Trump did erect some barriers, and new tariffs on steel and aluminum imports (25 percent and 10 percent, respectively) caught the most attention. GIS expert Emmanuel Martin warned that the Trump administration was making a mistake akin to the Smoot-Hawley Tariff Act of 1930, which many economists claim had disastrous effects.

Playing off a high-profile statement Trump had made on Twitter, Martin reminded him that trade wars are bad, and nobody wins them. “The simplistic mindset in which ‘exports are good, imports are bad’ is wrong,” Martin wrote. In the end, putting up barriers to trade risked retaliation, an increase in economic nationalism, and ultimately, lower global economic growth.

Professor Colombatto also pointed out that Trump’s success in implementing such barriers could turn out to be a Pyrrhic victory. Reducing the trade deficit with countries like Japan and China would ultimately strengthen the dollar, making American exports less competitive and imports cheaper. “So back to square one, with a widening trade deficit,” he wrote.

GIS guest expert Derek Scissors posited that Trump’s protectionist initiatives would not have as big of a negative economic impact as some thought, since the United States does not suffer from slow growth, low innovation, or low consumption.

“Where inequality is high, economic participation is declining and consumption has a high share of GDP, protectionist help for struggling producers and workers is more sensible,” he wrote. “The main problem for the United States is not that protectionism will blast consumers, since their buying power is currently high. It is that the domestic economy is so large that even dramatic changes in trade policy do not have much impact.”

The Art of the Deal

Trumponomics favors bilateral trade deals over multilateral ones. Trump was quick to withdraw from the TPP (it was one of his first executive orders) and has begun renegotiating NAFTA with Canada and Mexico. The administration has not formally ended negotiations on the TTIP, but is clearly not enthusiastic about that deal either.

GIS expert Uwe Nerlich noted, while writing on the Trump transition, that concluding new agreements with individual partner countries will be a long, hard slog. “Renegotiating trade pacts is a long process with uncertain outcomes. That means the new president cannot rely on successes in this area to buttress his domestic agenda in the near term,” Nerlich wrote.

GIS expert Walter Lohman detailed the effects of U.S. trade policy in the Pacific, writing that “the current context makes outreach on potential new trade agreements in Asia very challenging.”

Japan, for example, is not interested in entering a bilateral agreement after having made concessions for the TPP, Lohman wrote. Previous administrations have entered negotiations with other Southeast Asian countries, but did not successfully conclude a deal, and there is little to indicate circumstances have changed enough for a different outcome.

Finally, the Office of the U.S. Trade Representative “simply does not have the resources to effectively take on new negotiations,” considering it has been given the responsibility of reaching exemption agreements on 232 tariffs with individual countries.

NAFTA Challenge

Renegotiating NAFTA will prove even trickier. GIS guest expert Andrew Selee wrote that Trump’s determination to rework the deal was the “greatest concern of the Mexican authorities” at the time. “The Mexican government will have to think strategically about what concessions it is willing to make. It will also need to coordinate with the Canadian government to strengthen its hand in what could otherwise turn into a very dangerous negotiation for Mexico’s economy,” he wrote.

So far, Trump has met stiff resistance from both Canada and Mexico in renegotiating the deal. But gaining concessions may be less important in the short term for Trump than ensuring his electorate sees he is working to change the agreement. In a report on Latin America’s Trump problem, GIS expert Joseph S. Tulchin wrote: “Merely entering into discussions with Canada and Mexico [on NAFTA] will constitute a victory for Mr. Trump, even without producing any results. The talks could drag on for years.”

Tax Cuts

In December 2017, Trump scored the biggest win of his presidency with the passage of his Tax Cuts and Jobs Act. The centerpiece of the reform was slashing the U.S. corporate tax rate from 35 percent to 21 percent. The law also lowered tax rates for individuals, doubled the standard deduction and expanded the child tax credit.

As early as February of that year, Colombatto had predicted that the Trump administration’s real bet was on tax cuts rather than the protectionism that was worrying many. “If the Trump administration manages to implement the fiscal-policy side of the president’s program (lower corporate taxation), much of the protectionist talk will remain mere chest-thumping,” he wrote.

Colombatto warned of some important dangers. While extolling the virtues of lower taxes, he worried that combined with Trump’s planned spending increases, they could lead to an unsustainable debt-to-GDP ratio. So the benefits of the tax cuts could be relatively modest, while the political and economic costs could be substantial in the long run.

Encouraging Investment

Just before Trump signed the tax cuts into law, Prince Michael set out a differentiated view of the new legislation, saying criticism of the legislation “does not appear to be fact-based, but rather subjective, mainly emotional and ideological.” He pointed out that while critics claimed the corporate tax cut would result in dividend payments for rich stockholders, the reality was that small and medium-sized firms would benefit greatly and would use the extra money to invest.

GIS guest expert Adam Michel detailed how the tax cuts would usher in a new era for U.S. investment. “Businesses have already pledged to expand in the coming year. AT&T Inc. has committed to investing $1 billion in U.S. infrastructure and jobs in 2018. Boeing, Wells Fargo, Comcast, and many smaller companies also announced pay increases, bonuses and other new spending as a result of the tax reform,” he wrote. “More can be expected to follow in the coming years.”

Though the reform would result in a one-time addition of $400 billion to the $20 trillion national debt, increased revenue is projected to fully cover that in about a decade, Michel said. The larger issue regarding U.S. debt, he noted, was not the tax cut, but Washington’s ever-increasing spending, which is projected to increase by $10 trillion over the next 10 years.

The Federal Reserve

GIS guest expert Lars Christensen noted that Trump and the Federal Reserve could turn out to be strange bedfellows. Despite Trump’s criticism of loose monetary policy under then-Fed Chair Janet Yellen, it was clear that markets were not expecting aggressive interest rate hikes. And restraint on the side of the Fed would help raise aggregate demand in the United States.

Moreover, Trump’s planned spending, especially huge outlays on infrastructure, “would allow the Fed to raise interest rates without really tightening monetary conditions,” wrote Christensen.

As it got closer to the time for the Fed to begin raising rates, however, speculation rose that it was aiming for the so-called “natural” interest rate. Colombatto suggested that the Fed could be seeking cover in this misleading term, “as a way of letting people know that a new target is being adopted and that this new target is less open to public discussion.”

Colombatto continued: “The Fed may be anxious to keep ample discretionary power and resist pressure from outside,” since the Trump administration would resent an overly strong dollar as hurtful to U.S. exports and domestic producers trying to fend off foreign competition.

Martin analyzed the effects of the Fed’s exit from quantitative easing. “Some economists worry that reducing the Fed’s Treasury holdings will push up yields and the costs of government debt service, although others say that would only give President Donald Trump’s administration further incentive to cut spending,” he wrote.

However, Martin said, a tighter monetary stance would attract capital flows to the United States and strengthen the dollar, which in turn could hurt competitiveness and exports. But “these negative effects could at least be partially offset by Mr. Trump’s planned corporate tax cuts,” he wrote.

Slashing Red Tape

While Trump’s tax and trade initiatives have received the most attention among his economic policies, GIS guest expert Diane Katz pointed out that the administration has overseen a regulatory revolution, significantly easing the burden of red tape on U.S. businesses.

For example, the White House withdrew 635 previously listed rules, rendered another 244 inactive, and delayed 700. Trump has also committed federal agencies to cutting future regulatory costs to the private sector by some $9.8 billion.

The Trump administration also issued two-thirds fewer regulations (1,209) than the administrations of presidents George W. Bush (3,233) and Barack Obama (3,356) in their first years. The number of “major” rules (those anticipated to cost the private sector $100 million or more annually) numbered just 32 in Trump’s first year, compared to 73 under Obama and 51 under Bush.

Such changes could have a positive effect on the U.S. economy, since “independent estimates peg the private-sector cost of U.S. regulation at more than $2 trillion annually—more than is collected in income taxes each year,” wrote Ms. Katz.

Fossil Fuel Focus

Energy policy—especially the expansion of fossil fuel extraction—constitutes an important part of Trumponomics. By increasing output of oil, gas, and coal, the United States can grow its economy and gain energy independence. The boom in shale oil and gas, which began in the United States, shows the power of markets, wrote GIS expert Carole Nakhle:

“The economic gains resulting from the industry’s development, and perhaps more importantly from the reduction in oil and gas imports, will give the new administration of President Donald Trump a longer lease on life. Achieving energy independence has been the aspiration of almost every U.S. president since World War II. … Thanks to the shale revolution, it could become reality under Mr. Trump.”

GIS guest expert Stephen Blank commented on the return of shale and scenarios for the Trump administration that the shale boom played into the administration’s hands “as a way of generating both jobs and revenue for an ambitious investment program in domestic infrastructure. It almost certainly means a big boost to American shale exports.”

He added that this would strengthen U.S. influence on global energy markets, potentially allowing it to push down prices and imports over the long term, while attracting foreign investment to build new refineries and terminals and stimulate the economy.

Geopolitical Intelligence Services is a research firm based in Liechtenstein. This article was first published by GIS Reports Online.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.