“Trump’s tax and trade policies could hurt Australia and the world,” say Australian columnist Henry Ergas. Could hurt Australia and the world and, by necessity, us in New Zealand.
You see, if you remember, “at the heart of Trump’s programme are sweeping cuts in personal and corporate taxes….” However,
Those declines in revenues aren’t matched by expenditure cuts: on the contrary, many outlays are set to rise. In defence, Trump has supported a 350-ship navy, which, the Congressional Budget Office estimates, would add $US120 billion to projected outlays, along with expansions in the army, the air force and the marines that would cost nearly as much…
So an already stratospheric deficit made astronomic, just as interest rates themselves are beginning to climb.
The effects are predictable: as US interest rates rise relative to those elsewhere and foreign savings flow into the US to finance the budget deficit, the US dollar will strengthen, much as the Australian dollar did in the wake of former prime minister Kevin Rudd’s stimulus spending… The dollar’s further rise will only accelerate the deterioration [of American manufacturing], with a sizeable part of the fall in the current account balance likely to come from increased imports of manufactured goods.
This is hardly the first time that has happened. Rather, experience has repeatedly shown the devastating effects of large, unfunded, tax cuts on US competitiveness.
Never were those effects clearer than in the early 1980s, when the combination of a tight monetary policy associated with Federal Reserve chairman Paul Volcker and an expansionary fiscal policy associated with president Ronald Reagan increased long-term interest rates, attracting capital inflows that drove the currency to a 40-year peak.
Equally, the tax cuts initiated by president George W. Bush were ultimately funded by foreign purchases of US government bonds, propping up the dollar and worsening American manufacturing’s decline.
As Jeff Shafer, a former undersecretary of the US Treasury for international affairs, has argued, those exchange rate effects — which are symptoms of poor domestic policy settings — have swamped other factors in distorting the American economy, shrinking the traded goods sector and shifting resources into services (and in the lead-up to the financial crisis, housing).
And as Trump’s deficit increases, the effects on the Rust-Belt voters he claims to be looking after will become progressively worse, their pain steadily greater. What then?
As that pain makes itself felt, it will be harder and harder for Trump to back away from the anti-trade rhetoric that dominated his campaign, with China — whose currency is weakening because of capital flight — squarely in the protectionists’ sights. Reagan was a committed free trader who worked hard to contain cries for protection when the trade balance soured; Trump is not.
The risks that poses for Australia [and New Zealand] are obvious. Already now, the world is hardly in great shape. With the inauguration just 60 days away, expect it to get uglier.
[Hat tip Catallaxy Files]