Trumponomics and side effects

International economists are scared stupid over Trump.  In some ways correctly, in some they are blind to the Obamabull we have had the last 8 years which has killed growth.  That’s what they have at home--low growth, much social welfare.

            Yet they rightfully raise many pitfalls.  Trump’s plan is lower taxes, cut regulations, draw corporate money home by less business taxes, protect US manufacturing while reworking trade to our advantage.  Much of this will work, though the protectionism is controversial and if overdone, will cripple US trade.  My hope is that he’ll leave the trade stuff until later.  US growth is suffering from Obama’s over-regulation.  Everything from haze( humidity and dust) in the atmosphere being declared a pollutant, to puddles being called navigable waters, to Obamacare is killing business and raising the prices of what we buy.  Highest corporate taxes in the world and being virtually the only country which tries to reach out and grab taxes of Americans overseas, makes companies flee to other shores and try to re-incorporate in foreign countries.  High personal taxes sap small biz growth which is the main creator of new jobs. 

All this is Reaganesque, and exactly what the internationals fear.  For a strong US economy means growth means higher interest rates.  This draws foreign capital, especially when somebody overseas fears their home politics or markets.  Foreigners with dollar denominated loans get killed when US interest rises and the dollar goes up to boot.  In 1992 this caused a debt crisis among foreign governments who had borrowed in the US to support their deficit spending habits.  It badly hurt Slovenia and places as close as Mexico. The ensuing recession (a lot of it was foreigners defaulting to US banks) spread but was mild in USA.  Bush and Congress intervened to help Latin America.  If this kind of thing develops again, look for foreign governments to invoke capital controls.  That will make our borrowing costs go higher still. Then if interest doubles or triples, federal debt service on all that $20T Obama ran up, will crowd out other spending in the budget. 

Secondly, a high dollar with good US growth means imports get cheaper and our trade deficit gets larger.  But Trump can’t just slap on tariffs the way we could do in the olden days.  Supply chains are sprawled out all over the globe.  An American made car has 75-90% of its parts made elsewhere. Protectionist tariffs mean killed growth in most industries. A battle over exchange rates with China could prove very harmful to the US.  All this is to say the growth might be shorted out, economic instability in some sector (something gets overbought, then crashes) arises and we get recession.

Thirdly, the low tax, low regs boost will likely result in some really wealthy people who play the situation well.  This inequality will just stoke the heck out of the demagoging Democrats.  The key to overcoming this toxic politics is to have more people finding more jobs and better pay overall, new folks re-entering the job market, etc.  That’s what Reagan did in the 80’s and it made the Dems look like crybabies balling about how everybody was making money but them. 

Still, none of this will be easy, especially when you think about how slow the recovery will be.  Businesses won’t instantly close foreign plants and move back to USA.  Businesses will still worry and hedge their bets about future Obamas coming to re-regulate.  Banks will still be nervous about their loans. And Trump wants a big spending binge by Congress for infrastructure and stimulus.  At best, it will stimulate.  At worst, government gives pork that does little to spur growth to friends and supporters. And then protectionism may cause all sorts of problems.  If I were Trump I would go easy on the protectionism and stimulus.

The internationals are worried because they invest all over the world and our spark of growth could light bonfires all over the globe. British (and other) bankers will be holding lots of foreign debt that may default over a high dollar.  If US manufacturing grows and plants in Nigeria or Egypt close, look for revolts, civil wars and jihadism to spring up all over.  Then what?  Let Russia and China take advantage and gobble up territory? Let an ISIS-like movement go wild? We’ll gladly take the pill, but watch out for side effects.