Trumponomics

Mr. Trump's proposals are hardly what American economy needs

At a first glance, Donald Trump's intentions about the economy might seem exciting: he promised big public spending and tax cuts to substantially boost the economic growth, and the protection of American firms and workers from abroad competition. Yet an analysis of the current American situation shows how such proposals are out of context, potentially damaging and often inconsistent.

It is absolutely right that a fiscal stimulus can be very useful to help an economy into recession and to stimulate growth in certain circumstances. But this is not the case of the American current situation: the economy is growing and in November the unemployment rate reached a new low level of 4.6%.

There are two ways an economy can grow: by increasing the number of workers (more precisely, the total amount of time spent at work) and/or by increasing the output per worker (the output per unit of time). As regards productivity, it is - for a number of reasons - quite low in developed countries and it is clearly something that governments cannot improve via fiscal stimulus. At the same time, the current situation close to full employment means that there is not much room to increase the number of workers. The combination of these two factors implies that the desired output boost cannot mathematically be achieved.

In this context, a fiscal shock produces an increase in the demand of goods and services that cannot be satisfied by a corresponding increase in production: the resulting imbalance inevitably brings to higher inflation. In other words, the nominal GDP growth induced by the government intervention would be only driven by inflation, leaving the real GDP not affected and the same time causing a useless rise of public debt.

The other big point of Mr. Trump's economic agenda is the introduction of tariffs on imported goods and services because, he says, globalisation is a bad deal for America, and the proof is its negative balance of payment. Indeed, there is no doubt that a trade war would damage the global economy as a whole. Most importantly, the economic theory shows how free trade is not a zero-sum game, with winners and losers, but is something that - if well regulated - improves the situation of everyone involved: it creates more competition, with the related beneficial effects for all consumers, and allows the creation of global shared standards for goods and services.

Firstly, Mr. Trump is missing a very important point about how the international supply chain works. Just to make an example, every dollar of American imports from Mexico includes around 40 cents of American output embedded within it: imposing tariffs on these goods would be a huge damage for the corresponding American producers.

Secondly, his policies are clearly inconsistent between them. The consequences of the proposed fiscal shock are higher inflation and a strengthening dollar, which add pressure on the negative balance of payment. Moreover, Mr. Trump criticised the Federal Reserve for the abnormally long period of ultra low interest rates: but actually, a too early restrictive Fed's movement would have undermined the economic recovery and weakened the balance of payment, which are the very things the president elect is fighting for.

Mr. Trump will take office on 20th January and the world will finally see if and to which extent he keeps his promises. The certain thing is that 2017 will be an uncertain year, both for the real economy and for financial markets: Brexit negotiations will begin and several elections with populist movements involved will be held in Europe. Trumponomics will surely not help to calm things down.

2017.01.08