Trump's Neo-Keynesian Impulse
To give equal treatment to the economic ideology divide, appease his inner Keynesian, and repel congressional Republicans, Trump has offered infrastructure spending, expanding oil and gas exploration, rewriting trade agreements, and protection of local jobs. Trump built a career by placing his name on buildings. Now, the President-elect will unleash a fiscal program to continue that tradition with some material risks.
Building the future. The United States infrastructure is unquestionably in need of an update, as aging infrastructure costs the economy billions of dollars per year in lost efficiency. Trump’s argument to spend a trillion dollars on infrastructure over the next decade would seem to help address the issue. The proposal suggests tax breaks and preferential treatment for investors who provide capital. The challenge is that most investors in infrastructure are institutional investors and are dominated by tax-exempt pension funds. Further, infrastructure projects are usually at the state level, who already issue non-taxable bonds.
An infrastructure plan based on providing toll roads and other user pay investments would provide a better alignment of cost and benefits. What is unclear is why a tax incentive is needed to support the investment. The highway trust fund already aligns the costs and benefits quite well for the national highway system through the gasoline tax. User pay systems already exist at most airports. With capital and revenue already well aligned, a tax incentive in this instance is of dubious benefits for growth.
Future fossils. Expanding oil and gas exploration seems a natural path to using abundant US resources to our advantage. The challenge is that it may be focusing on the last battle: domestic demand for oil is expected to decrease over the next few decades. The challenge is the headwind from renewable energy in wind and solar as they breach the utility cost threshold. Focusing on fossil fuels may position the US to provide a high cost product in a declining market. Even if the competitive forces were not a headwind, the ability to increase employment in the face of greater efficiency in the extraction industries is a challenge.
The problem of private companies competing with the government supplied infrastructure is that they face a natural headwind: the US government has the lowest cost of capital and does not require an operating profit. This deficit is a real hurdle for private investors in public goods to overcome to achieve more efficiency. An open and transparent bidding process for private companies to deliver on the proposed projects would create value by ensuring efficiency and market determined returns on capital. Focusing on pro-market ideas and away from a pro-business agenda would probably induce higher growth and reduce the rent-seeking of crony capitalism.
Trading benefits. The benefits of trade come from centuries of research and evidence. The argument for restrictive trade seems anti-growth; however, the advantages of free trade come with drawbacks for some people. A pragmatist would argue that the challenge is that most trade agreements provide free movement in capital and goods, but restrain the mobility of the third input into production, people. This deficiency permits capital and goods to exploit people, sometimes with harsh consequences. The European Union came closest to the ideal of free trade: their one problem was a rather poorly thought out monetary union.
The protection of jobs was a mantra that Trump espoused during his campaign. He delivered a symbolic victory in Indiana just after the election. While the benefits are unclear, the optics of protecting jobs won high accolades. The critical question is why were the jobs lost. Certainly, an untamed supply of labor would reduce the price of labor, but not the job. The challenge is that the evidence seems to point to the technology, automation and trade as the culprits, not immigration. Maintaining the level of jobs may result that workers that are worse off as higher costs erode their wages. Fighting against the tidal wave of time offers little hope to those displaced: focusing on preparing people for the jobs of the future is probably more effective.
Demographic drawback. The possible impact of President-elect Trump´s policy proposals seems to provide questionable benefits to employment and growth while providing advantages to capital. Given his constituents asked for jobs and not higher return on capital, the focus may be a bit misplaced. The biggest headwind for employment and growth may not be the plan´s lack of focus. The larger challenge is the demand side and what the future demographic profile of the country holds for the future.
Reagan´s ascent into the rarefied air of elite economic Presidents came with significant tailwinds: the economy was in recession with high unemployment, inflation was rampant, and most of all, the demographic profile had the largest cohort of workers entering their prime earning years. Trump will face the challenge of reducing unemployment from a rate near historic lows and inflation that has remained stubbornly below target for an extended period. These are not insurmountable challenges; however, they will be formidable forces to fight if they are secular trends and not cyclical.
The demographic dividend though will be the strongest headwind. Whereas Reagan enjoyed an expanding prime age population, Trump will be lucky for it to remain level. If his promised immigration restrictions occur, then the level will decline. This challenge is tough to overcome when seeking to expand growth and employment, as Japan knows all too well. In an economy that continues to make a transition to service-providing from good-making, it will be increasingly difficult to leverage any of the benefits that higher returns on capital would deliver: services require people and demand, not an increased supply of capital.
Strategy Risk. Return on capital does not return growth. There are strategic risks with Trump’s economic plans that focus on the return on capital, rather than on growth and employment. They may reduce employment as corporations and government cut jobs, reduce government revenue at the expense of higher deficits, positioning the economy uncompetitively in fading industries, reduce efficiency as trade barriers rise, inefficiently allocate capital in public goods, and diminish incomes for those most in need. The reign of the return on capital may have a short run. The structural wall that Trump´s economic plan faces is not insurmountable; however, the real barrier appears a wall of his making.
Note this is the second in a two-part series on Trumponomics. The first article is here.