Two Trump Economic Trajectories

I don't have a crystal ball. I did not know, for example, that Donald Trump would be elected President, despite coming 2nd in the popular vote.

But the Macroeconomy in the short and medium term is not very complicated. It's unpredictable to be sure, but the reasons that it is unpredictable are themselves reasonably straightforward and uncomplicated. The Macroeconomy is the sum total impact of hundreds of substantially relevant decisions made by millions of people, and sometimes we can't predict what millions of people are going to do in hundreds of different, important, ways.

But the sum totals ... they are relatively straightforward in the short and medium term

The process of producing new goods and services generates new income to owners of resources. The most important of these resources is labor, and the income to owners of labor are our (remarkably stagnant) wage and salary incomes.

Because the Rich SOBsTM are, as always, taking all of the income growth they can grab, and because, over the past half century, we have been letting them grab a bigger and bigger shares, so that today they are basically grabbing all of it ... income growth by the middle class is not going to be a growth driver. Maybe it could have been a growth driver, if Bernie had won the primary, then the general election, but he didn't, so it can't be.

We cannot get a growth driver by recycling a bigger share of income than before by driving down saving and driving up consumption ... because we already did that, in the 80s and 90s and Noughties, and there is no further to go in that direction.

So if growth is going to come, it's going to come from growing injections of money into the purchase of new goods and services.

And one of two things can happen:

  • 1. it will be generated, and there will be short to medium term growth;
  • 2. it won't be, and the financial house of cards we patched over but never fixed will collapse, again.

There really isn't an option three.

If the House GOP gets its way, it will be option 2: steep cuts in government services, steep cuts in taxes, but directed toward Roch SOBsTM, and not the middle class and working poor who will be soaked by the states to cope with the fall-out of the steep cuts in Federal government services. The middle class and working poor will get less benefit, pay higher taxes, have to divert existing, stagnant incomes to pay for lost government service provision, and consumption demand will drop. And just as when we experienced a mild recession in late 2007 and early 2008, the loss of GDP growth will reveal that the financial casinos have dodgy balance sheets and we get the Panic of 2017 or Panic of 2018.

But it doesn't necessarily have to be that way. It could be more like the Recession of 2001, where a Republican administration engaged in reckless asset bubble priming to kick the can down the road for some indefinite period of time.

The instrument for that would be the "$1 Trillion" infratructure plan.

This is a scheme to provide some interest rate subsidy and construction period bridging finance to subsidize private firms building infrastructure to generate revenue down the track, with guaranteed 10% returns. The money would come from a combination of "carrot and stick" on US profit tax that is postponed by holding the profits in overseas subsidiaries, with a "grace period" of being allowed to bring the money back at a substantially reduced rate, versus having some of that deferred profit tax guaranteed by an upfront withholding.

There are expectations of getting something on the order of $140m under that scheme (with a tax subsidy from the forgiven tax of many times that amount), which would be sufficient to provide the seed funding for a "$1 Trillion" infrastructure bank.

This is, of course, another "kick the can down the road" policy:

  • 1. Because of the private profiteering, it will be time for middle class and working poor to pay the piper as they use the infrastructure that has been built
  • 2. Only projects that generate a revenue stream sufficient to fund their construction can be considered, so a massive amount of public good will be foregone, as we build projects that under what is only a slightly modified version of the same "commercial viability" test in force for purely private projects ... and refuse to build projects with substantially better full economic benefit per dollar full economic cost. So instead of offsetting the same inefficient "commercial viability" bias that our economy suffers from today, we will be amplifying it.
  • 3. And nothing is being done to change the core weakness of essentially all of the nation's per capita income growth being stripped off by the Rich SOBsTM, so any short or medium term growth that results will eventually get sucked down the black hole of the wealth hoards of those same Rich SOBsTM.

So a "Trump Growth" economy is possible. It's not likely to be a 2-terms-worth-of-growth ... just as the limp and limping "Bush Growth" economy was not 2-terms-worth-of-growth ... but it could be enough to postpone the Crisis until after the 2018 election.

So don't bank on a pre-mid-term recession to turbo-charge the backlash against Trump in the 2018 mid-terms. It could be there, but it's also feasible for Trump to kick the can down the road to 2020 or later.

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