Thanks to Trump speech at the US congress we start to fully apprehend his economic plan and, perhaps also, start to grasp the underlying economic vision which is leading his choices.
What matters now, is to ask ourselves: Is this plan a coherent one? Is there a solid economic rationale? And if this is the case, can we capture the main contours of this vision in economic terms?
The main objective of this article will be to illustrate the means, which Trump wants to mobilize and how he intends to reach his goals.
Two main elements can be highlighted from the speech:
I. Trump is asking the United States congress to approve cuts on several existing programs and various administration costs. And, in the meantime, he is asking to increase military expenditures and (surprisingly) approve a huge infrastructure expenditure plan. Currently, the contours of these cuts and expenditures increase are largely unclear (a part the military bit).
Later -in this article- we will focus mainly on the infrastructure expenditure plan, which is, indeed, a surprising element, whereas the cuts in the administration and the increase in military expenditures are typical republican policy.
II. Trump proposes an important cut in corporate and individual income taxation, coupled with partial or full roll back of the Dodd–Frank bank regulation act: The congressional process required to roll back the act will likely be quite complex and time consuming. On the contrary, the tax cuts are likely to happen more quickly, despite being politically trickier: Trump has promised a massive tax cut for the American middle-class and not another reform beneficial to the top one percent.
Now, we can ask ourselves two seminal questions: A) what is the rationale behind these two sets of measures? B) Is there a link between them, i.e. why it is key to present both simultaneously?
To answer let’s take a closer look at the most unusual aspect in point I. above:
the one trillion dollar expenditure plan concerning infrastructure.
A lot of caveats are associated with this plan, two of them deserve further scrutiny:
a) Who will bear this cost? It seems that the administration wants a sort of partnership with the private sector, using tax credits: But then, how much will be borne by taxpayers and how much directly on private sector shoulders, i.e. banks, financial market in general? There is no clarity at this stage.
b) Who will build this infrastructure and who will decide what to do and when? Such a humongous plan needs a lot of constructions workers and a lot of coordination- potentially an entire bureaucracy -: Is the administration sure there will be enough workers (without the Mexicans) available for such a long time and spread across the entire country? Who will coordinate the project? A new federal agency? All these “details” remain undefined.
For the time being, it is far more pertinent to understand (and investigate) point a), i.e. why the private sector would be interested in financing such a plan and using which money (especially considering interest rates are likely to raise soon).
Take a step back and look to the other part of the program, namely point II. : Trump wants to implement a substantial corporate tax cut, which aims to bring back the vast amount of liquidity amassed by major US companies overseas -the main example being Apple which capitalized an estimated amount of cash overseas of 246 billion-.
If the corporate tax cut is implemented, then these major corporations are expected to repatriate the cash. Firms would then face a twofold dilemma:
1. They can decide to increase dividends, which might explain why the Wizard of Omaha (Warren Buffett) bought heavily Apple’s shares last year- or 2. They can decide to invest in new production plants in the US (quite certainly the most preferred outcome in Trump’s mind).
Now, option 2. makes (economic) sense only if you accept the following hypothesis: the current chain of production and distribution used by major American firms is inefficient and an increase of efficiency can be obtained by re-investing in the US. This is a major hypothesis: large US firms ‘production chains (which includes several plants in several countries working in a “tense” web relationship) have reached a very high standard of efficiency due, manly, to the numerical revolution.
It is clear the US administration can disrupt these chains by using commercial barriers. Nevertheless, a lot of these groups are fighting global commercial battle, Apple and Samsung is the main example, and the US market despite being an important one, it is not the only one for them (globalization is played by an orchestra of countries and no more by few occidentals’ countries).
As such, those firms cannot modify something that works and switch easily to some undefined/ unprepared more US centric solution: The likelihood of losing the global commercial battle will just increase for them. In addition, commercial barriers remain a dangerous option for Trump’s team: If the US starts a commercial war why would others remain silent.
I continue to believe that president Trump will end up moderating this part of his program because US major businesses have just too much to lose.
From this analysis, I reckon that the most likely outcome after corporate tax cutting would be an increase in firms’ cash distribution, i.e. option 1. above.
The shareholders (mainly, the famous 1%) will then receive a lot (of new) money and they will need to invest these new amounts: by imposing favourable fiscal terms, the US government would then try to convoy these additional moneys into its infrastructure plan. Interestingly, the fact that, simultaneously, banks would become more risk-taking actors- due to the reduction of banking regulation- should also help the process.
Three final remarks/warnings need to be stressed here:
A. Trump’s team need to come up with a solid scheme how he intends to move money from private individuals/ institutions to a semi-public (government regulated ?) system: The last time we saw a president trying to favour this sort of transfer we ended up with the subprime crisis, i.e. the seeds of the mortgage meltdown were planted during Bill Clinton’s presidency when he decided to loosen housing rules by rewriting the Community Reinvestment Act, which pushed banks over invest in the home mortgages market.
B. Trump’s administration cannot simultaneously ask US major firms to bring home tons of cash earned in foreign countries (i.e. efficient production plants) and foreign markets (i.e. key selling points) and then fight commercial-fiscal wars with those countries.
As explained above, Trump needs this money back, but he needs to keep alive the flow, i.e. those groups need to remain highly profitable. From this perspective, we foresee no benefits for the US government on entering any commercial-fiscal wars with foreign countries.
C. Politically, Trump needs to implement a successful infrastructure plan: He has been elected based on a gloomy and pessimistic economic picture of his country, several US fellow citizens agreed with him about this representation and cast a Trump vote on the promise of bringing back some form of decent (secure) work and thus prosperity. Now, as explained above, and despite some exceptional cases, we do not believe in any large re-investment movement coming from major groups: On that side, we forecast minor effects concerning job creation in poor areas.
It is precisely, for this reason, that Trump needs his infrastructure plan up and running as soon as possible: this plan is needed to create jobs among the “rust belt” (low human capital) population. For them American first clearly means the creation of thousands of stable jobs.
As a conclusion, underlying Trumps’ announcements there is a main target: To assure a transfer of wealth from the globalization’s winners into the hands of the losers. Only time will tell us if this (still highly hypothetical and unclear) scheme will be solid enough to move (in a normal positive/ raising interest rates environment, by the way) money from US coast’s affluent people to its inner territories’ poor (low skills) people via new job creation.
That said, in a medium long term perspective, only one factor can really save these areas: A huge investment in education and new technologies and this should be done, ideally, in parallel with the implementation of the infrastructure plan, but we can doubt this will be done anytime soon!