The Trump Economic Formula as a template for New Zealand.
He’s President now and the core question is will he be moderated or is it a case of what you’ve heard is what you’re going to get? A second order question – although first order for us in New Zealand – are any of Trump’s economic ideas relevant as a template for managing the NZ economy in the years ahead?
Let’s first recap the guts of the Trump promises
- A $1tn programme to make America’s infrastructure ‘great’ again. Obviously the employment effects will be significant as they were in the 1930’s.
- Pulling back from the US international security obligations, and requiring allies to fund a significantly higher portion of joint military defence and adventurism. Remember this grew enormously from the era of George Bush I and Desert Storm et al. Relieving the US of this annual overhead will help finance other stuff.
- Acknowledging that the era of easy money is not stimulating growth and inflation and that the time for fiscal stimulus has arrived.
- Measures to encourage American corporates to repatriate the $2.5tn they have stored abroad and invest it at home. Lowering corporate tax in America to 15% as well as offering a one-off repatriation amnesty fee of 10% are amongst his carrots. His sticks include discriminating against US firms that employ overseas (Chinese) labour. This makes life hard for Apple, Google and Amazon for instance.
- On trade Trump intends to cancel or seriously modify any bilateral trade deals which in his view don’t provide a net benefit to America. This is a very difficult policy to assess as his notion of what constitutes “success” will no doubt shift with his political barometer. But it does portend serious realignment of the bilateral trading relationship with China.
There are questions about how much of this will he actually do, and how fast. Assuming he does follow through, the question becomes how will he fund his fiscal expansionism, particularly if the foreign bond buyers of China and Europe are less willing to keep funding the US deficit? And will a lower trade world be a less prosperous world with the inevitable negative effects on commodity prices being one manifestation of that?
The answer of course is we don’t know – and won’t until he starts showing us his new reality. If a fiscally-stimulated America has to fund it itself internally, it will either run into inflation pretty quickly (if it prints money) or crowd out private spending through higher interest rates (if it tries to sell bonds to households).
Shrinking world trade and rising US interest rates look like being inevitable if Mr Trump is good on his word. It’s not feasible that an infrastructure-led spend up in the US on his terms would be strong enough to stimulate much beyond his shores.
Can Europe step in and provide an engine room for world growth? Doubtful given its defences will be competing for funding. It could of course abandon that as a priority but given the internal stagnation within its own Southern States as well as Brexit seeing its second largest economy heading out on its own, it’s difficult to see Europe looking far beyond Europe.
How about China? Well it depends on selling stuff to the US no matter what it may say. And it has spent those proceeds largely on expanding the capacity of its economy enormously. In economic terms, it could end up all dressed up but with nowhere to go because its main customer stood them up.
Against this backdrop it is difficult to see New Zealand riding another commodity boom in the foreseeable future. We have to rely on our own devices to keep our economy growing and per capita incomes rising. And while we have plenty of options, the political will might be hard to extract. For example we have the Trump option – to switch to fiscal stimulus and away from the stimulus provided by high immigration, and free money has a number of hurdles.
- our productivity record is atrocious because we’ve invested so much in property development that frankly reaps little in terms of real income. This waste of capital had to come home to roost at some stage and it’s only high commodity prices that have delayed the inevitable
- our government has already mortgaged itself to the hilt and seems intent on leaving the cupboard bare for future generations. The contingent liability of NZ Super and the outstanding liability around the Christchurch quake are major overhangs on a government that refuses to plug the holes in the tax base. This underpins for the Bill English obsession with running surpluses despite what appears to be a low government to GDP debt ratio. It’s the off balance sheet contingent liabilities that have sent future taxpayers in New Zealand down the gurgler
- meanwhile our household debt ratios are anything but modest. We have absolutely huge expectations of what our houses are going to be worth, have borrowed up against those thoughts meaning any rise in interest rates – which is inevitable in a Trump world – will be a reality call of thunderous reverberations.
Let’s just hope that Trump’s bark is way much more than his bite turns out to be. Thanks to the “steady as she goes” dead weight inertia from our own political establishment our resilience to a truly Trump world is – well – not so great.
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Rich Allen commented 2016-11-16 14:24:56 +1300When Ike, the last great US Republican built the US highway system he did it with over 80% tax on billionaires income – and the US was not placed in debt thereby – and the rich still the richest didn’t mind. Trump is borrowing from the future trillions for his plan ;just as Mussolini did – the highway maybe be great like the trains will run on time but the money will all be debt we can’t afford to repay the value of dollar will fall and interest rates will rise – its a disaster in the making. Lowering the tax on corporations and repatriating overseas cash is good and will keep us afloat a year or two. Fending for yourself is stupid in the 21st century. A world with out Africa as trading partner will not help Trup does not believe in a system or party – he’s a character – and this is a tragedy !
Glenis Boulanger commented 2016-11-16 12:17:01 +1300I’m no expert but it’s pretty basic to cut expenses when you are in debt so I don’t think Trump is wrong with plans to reduce their contribution to worldwide security obligations. Who knows, with less money in the kitty maybe it will force the world not to be so quick to battle. Then again there are a lot of people on the gravy train so it may not be so easy to get it though.
Interest rates were always going to rise it’s just a matter of time and a catalyst. Maybe Trump is the catalyst or maybe the financiers will decide the US isn’t a good risk and rates will rise that way. Time will tell.
Colin Smithies commented 2016-11-15 21:25:31 +1300Matt Hudson let me take you back to first year economics…here is a set of lecture slides very much like the slides I saw in my first course of macro at Otago… I believe they are from the Mankiw textbook. follow this link:
Take special note of the difference between a large economy and a small open economy…in both cases fiscal stimulation is ineffective with a floating exchange rate. You may want to revisit the relationship between the IS/LM model and aggregate demand as the relationship will give you insights into how Trumps economics is a short run solution that will cause great pain in the long-run…especially if he is going to borrow to achieve the stimulation.
Matt Hudson commented 2016-11-15 20:47:03 +1300Colin – Correct me if I’m wrong but my understanding is…
– Fiscal stimulus = Govt putting more money into the economy to pay for work to be done ie. infrastructure work
– More money into the economy means a greater supply of money
– A greater supply of money means that the price of money will decrease
– Interest rates are the price of money. So if the price of money is decreasing, then interest rates will go down
– If interest rates go down, it will make our markets less attractive of overseas investors to invest in. ie. decrease the demand for the $NZ
– As the demand for the $NZ decreases, so too does it’s exchange rate (all things such as inflation being equal)
– The lower the interest rate, the cheaper our goods are to overseas buyers….thus driving exports.
So Fiscal stimulus does work to a point whereby the economy starts to pick up – as determined by an increase in exports and foreign earnings…
Then again, it’s been a while since I studied economics at Vic Uni….
Peter Broughton commented 2016-11-15 15:35:26 +1300Gareth, I’m not sure you answered your own second order question; ie are any of Trump’s economic ideas relevant as a way of managing the NZ economy? Is it time to invest significantly more in infrastructure to increase productivity? If so what? And how would we finance it? Certainly not from internal borrowing. There is of course the small matter of reopening direct rail and road routes between Blenheim and Christchurch! It seems to me there could be some worthwhile infrastructure projects from the point of view of productivity: strategic water management (for irrigation and freshwater export); investment in diversified organic agriculture (to obtain higher world prices by offering a premium product) spring to mind.
Colin Smithies commented 2016-11-15 13:11:02 +1300The problem with fiscal stimulation (as any good first year macro student will tell you) is that it only works as a road to recovery if the exchange rate is fixed. The link between the higher interest rates and the exchange rate is too strong so the fiscal stimulation will lead a higher exchange rate which will stifle any export led recovery.