Former Economics Editor of the NZ Herald

Brian Fallow: Thanks for nothing, America


So, now we have to turn our minds to the economic consequences of Mr Trump. There will be spillover effects on the rest of the world from his belligerent trade policy, his fiscally irresponsible tax policy and his likely approach to climate policy.

The Peterson Institute for International Economics - a non-partisan think tank of free trader views - points to three of Trump's stated positions in particular: his vows to impose a 35 per cent tariff on Mexico; impose a 45 per cent tariff on China; and renegotiate existing free trade agreements.

It disputes the comfortable assumption that a President Trump would not have the legal scope to do these things, citing several broadly written statutes which appear to give him scope to do so.

And as for World Trade Organisation disciplines, he has also indicated that he might withdraw from it.

Peterson's modelling concludes that the resulting trade war would tip the United States into recession by 2019, but that gross domestic product might return to where it would have been by the mid-2020s - assuming disrupted supply chains can be replaced and alternative markets found for US goods.

Together, China and Mexico account for a quarter of US international trade in goods and services.

"In the full trade war scenario, employment in 2019, the trough of the recession, falls by nearly 4.8 million private sector jobs," the Peterson analysis says

The trade war scenario would come at a time when growth in world trade has already slowed markedly.

And it is an open question how the Federal Reserve would respond, given its dual mandate. Would it tighten policy in response to the inflationary effects of more costly imports, or loosen (somehow) as US unemployment headed back up to an estimated 8.6 per cent by 2020?

The consequences of a trade war are not the only Trump effects the Fed would have to contend with, however.

Central to his economic policy is a pledge to cut taxes.

The independent Tax Policy Centre has crunched the numbers: "[T]he highest-income taxpayers (0.1 per cent of the population, or those with incomes over US$3.7 million in 2016 dollars) would experience an average tax cut of nearly US$1.1 million, over 14 per cent of after-tax income. Households in the middle fifth of the income distribution would receive an average tax cut of US$1010, or 1.8 per cent of after-tax income, while the poorest fifth of households would see their taxes go down an average of US$110, or 0.8 per cent of their after-tax income."

So taking Trump, unsafely, at his word, his election heralds a trade war between the world's two largest national economies, quite possibly a recession the US - one part of the world economy which is doing relatively well - and a grave setback to efforts to combat climate change.

The Trump plan would reduce the corporate rate to 15 per cent, and allow owners of pass-through businesses (such as sole proprietorships and partnerships) to elect to be taxed at a flat rate of 15 per cent rather than under the regular individual income tax rates.

This would be expensive. It would reduce the Federal tax take by about US$6 trillion over the next 10 years, the Tax Policy Centre reckons, before accounting for any macroeconomic feedback effects.

The scope to offset that with spending cuts is limited. Entitlement programmes for the elderly - social security and Medicare - plus defence spending, which Trump has pledged to increase, account for two thirds of the Federal budget.

He has said he will free up funds by lopping 1 per cent a year off the remaining third.

Sounds feasible, but The Economist estimates it would amount to a 29 per cent cut in real terms over a decade, to budgets which have already been slashed since 2011.

It is also unclear where those budget cuts would come, given his pledges to spend more on infrastructure, veterans, education and child care. It is hard to escape the conclusion he has just been making things up as he goes along.

The initial impact of his fiscal policy on US GDP might be positive - a sugar rush effect as households consume and businesses reinvest their tax cuts.

But further out, that effect would be swamped by the effect of higher interest rates as US public finances deteriorate - widening deficits and a rise in the national debt to more than 100 per cent of GDP.

Rounding up and deporting a significant portion of the US workforce would probably not be very good for GDP, either.

Then there is the great issue of our day and age, climate change.

Trump is a climate change denier, calling it a Chinese plot to undermine the competitiveness of US manufacturing.

As for the Paris Agreement which came into force last Friday, he told Reuters back in May, "I will be looking at that very, very seriously and at a minimum I will be renegotiating those agreements, at a minimum. And at a maximum I may do something else."

Make of that what you can. It does not bode well for the Paris accord, which essentially consists of national commitments underpinned by a combination of international peer pressure and cognisance of the science.

If the largest economy and second largest emitter adopts a free rider position on climate change, it is hard to see the accord holding together.

So taking Trump, unsafely, at his word, his election heralds a trade war between the world's two largest national economies, quite possibly a recession the US - one part of the world economy which is doing relatively well - and a grave setback to efforts to combat climate change.

Gee thanks, America

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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