Home / ECONOMY / Donald Trump’s economic plan: There is a lot riding on it, so where is it? – Donald Trump’s America

Donald Trump’s economic plan: There is a lot riding on it, so where is it? – Donald Trump’s America

Updated

September 01, 2017 05:24:37

Donald Trump said a lot of things in the lead-up to his election victory in November last year. His rhetoric divided America, angered many people, and excited others.

Financial markets around the world, however, were focused almost entirely on one thing: could Donald Trump turbocharge the US economy?

The consensus following his election victory speech was that he could.

“We have a great economic plan,” he said in the speech.

“We will double our growth and have the strongest economy anywhere in the world.”

It’s not just financial markets that have clung onto this statement in hope since then.

Tens of millions of Americans on food stamps and millions of underemployed and unemployed Americans have too. They are all hoping that tax cuts and more government spending will not only lead to more jobs, but more full-time jobs and higher wages.

Behind the scenes

You could be forgiven for thinking the President has left his economic agenda behind.

Trump’s had ample time to present a detailed economic policy, but we haven’t seen one.

But there are frantic efforts going on behind the scenes to produce something Republicans can take to Congress. The working group has been dubbed the “Big Six”, and it’s focusing almost entirely on tax reform.

Mr Trump’s brief to them incudes lowering the top marginal tax rate for individuals, cutting capital gains tax (not a popular idea) and cutting the top marginal corporate tax rate.

Who are the Big Six?

The tax reform process has so far been led by White House economic advisor Gary Cohn, Treasury secretary Steve Mnuchin, Senate leader Mitch McConnell, House Speaker Paul Ryan, Senate Finance committee chair Orrin Hatch, and Ways & Means committee chair Kevin Brady.

Here’s a brief timeline of what has been achieved by Trump’s economic team and the Big Six:

  • The Trump transition team developed a 14-page economic proposal between Election Day and inauguration.
  • In March, Cohn and Mnuchin unveiled a one-page tax proposal calling for a 15 per cent corporate tax rate and, on the individual side, reducing the number of tax brackets to three, with the highest rate being 35 per cent.
  • In addition, US economists are speculating that the corporate rate will likely fall to somewhere between 22 per cent and 25 per cent. Donald Trump, though, says he prefers a rate of 15 per cent.
  • In early August, Treasury secretary Steven Mnuchin said tax legislation was “the President’s highest focus”.
  • And, on August 15, National Economic Council director Gary Cohn said during a press conference that “We’ve got a great, I would say, ‘skeleton’ for tax reform”.

Separately to all this, the Trump administration, according to US media, has been holding “listening sessions” with CEOs and conservative groups to help formulate policy.

But could it already be game over?

The economists at Westpac wanted to answer that question. In doing so, they worked out what would give Donald Trump a bigger economic bang for the American buck: tax cuts, or infrastructure spending? It turns out its infrastructure spending.

The table shows what are known as “fiscal multipliers”. They’re like the ripples you see when you throw a stone into a pond. The benefits of an economic policy, done well, can spread far and wide throughout an economy.

The frustrating aspect of this table is that, as you can see, Mr Trump has his priorities all wrong. If the President wants to boost economic growth, he should first prioritise spending on infrastructure: the table shows that for each dollar Mr Trump spends here, the economy would grow by $1.30.

Even spending more on defence alone makes more sense than prioritising corporate tax cuts.

Mr Trump’s economic priorities seem to be at odds with what the experts say will produce the best outcome for the American economy. And, bizarrely, he also seems to be out of step with public opinion too.

A recent survey commissioned by the University of Maryland points to the fact the most Americans would actually cop a tax hike if it meant improving the budget bottom line, and, we can assume, the economy’s long-term prospects.

Markets are hanging on to something big

Global markets, and Wall Street in particular, have so far assumed Donald Trump will make good on his economic promises.

As you can see from the chart below, the Dow Jones Industrial Average has hit all-time highs.

The upward trajectory stalled around the time of the election because markets were not convinced Mr Trump had the ability to pass laws in Congress. Since then, however, the market has been climbing steadily, regularly making fresh record highs.

The markets see big corporations paying less tax (making them more profitable), consumers paying less tax and spending more (making companies more profitable); and stocks tied to defence or infrastructure spending making bigger profits.

Analysts the ABC spoke to believe there’s a roughly 20 per cent “premium” built into the market based on Trumponomics. So takeaway that premium and you have the makings of a rather large stock market correction, and the potential of a crash.

We’ve already seen the market wobble following Congress’ inability to pass healthcare reform (seen as a precursor to economic reform failing to pass) and after suggestions that Gary Cohn, who is seen as pivotal to Trump’s economic agenda, may be getting the sack. So I suspect the moment Wall Street decides Mr Trump will not be able to get his economic policies through Congress, traders will see red.

This would be bad news for America because, not only would tens of billions of dollars be wiped off the stock market, but the hit to business confidence would also cost many jobs.

Ripple effects across the globe

Australia, of course, is not immune to this.

Perhaps the most obvious effect would be a spike in the Australian dollar (as the greenback fell). That would likely cost Australian jobs as the input costs for many businesses rose.

It would also hurt some of Australia’s new key emerging sectors like education (international students) and tourism.

Other implications might include a stock market correction in response to a Wall Street correction (your super would be hit hard), and there would be a hit to business confidence here as well.

It has the potential, however, to put the US back into recession, and seriously damage other countries that trade with the US.

Rocky road

While these big economic plans are being worked out, the Trump administration will also be hard at work with several other issues that are in play: the fall-out from the Charlottesville riots; personnel shake-ups in the West Wing; the ongoing investigations into Russian interference in the 2016 presidential campaign; and now the practical considerations following Hurricane Harvey.

In the next few months, the Big Six is expected to hand off a proposal to the congressional tax-writing committees to flesh out the policy details and develop robust legislation.

It’s understood the group is very keen for a major legislative victory before the focus shifts to the 2018 midterm elections.

Here’s hoping the Big Six can pull it off. There’s a heck of a lot riding on it.

Topics:

world-politics,

business-economics-and-finance,

globalisation—economy,

markets,

donald-trump,

united-states

First posted

September 01, 2017 04:54:47

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