Monday, 21 November 2016

Trump’s tax and trade policies could hurt Australia, NZ and the world


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]


  1. Yep, bring back the Clintons! and their tax hikes and a 12000 page long TPP "free trade" agreement. That'll work :)

    1. Trump being wrong doesn't make Clintonistas right, and vice versa. Nor should the benefits of TPP's *freer* trade be derided just because it doesn't/didn't go all the way.

  2. Bernard Woolley would point out that astronomy generally happens above the stratosphere so going from astronomical to stratospheric deficits would be an improvement.

  3. Haha. Yes, was I typed that I thought must go back and check, doesn't sound quite right. Thanks for spotting.

  4. Do you think people understand the difference between a conservative and a libertarian now? And the very little difference between left and right in politics? One can only hope...

    1. Planes have left and right wings. they are complete opposites but are dimensionally identical and do exactly the same job. Same goes for political parties.

    2. A conservative is a member of a parliament (e.g. US Congress) or perhaps a head of state (e.g. POTUS) who DOES at least SOMETHING for capitalism.
      A libertarian is somebody who TALKS A LOT (perhaps, a blogger), DOES NOTHING (because they cannot even sustain a political party here in NZ) but constantly CRITICIZES those who DO at least something.

  5. I'm not sure about how free(r)trade can be used in the same sentence as the anti freedom organisation of Gov't. Free trade agreements are expensive , complicated pieces of legislation where the productive have to get permission from the unproductive on how they should conduct their business dealings. Reducing impediments to trade is good but when did you ever see a gov't that didn't like imposing rules on how people live their lives.

  6. When government intervention is the norm and the default, tell me how it's possible to achieve freer trade without free trade agreements that impose rules on how much gov't can interfere??

    If you can't answer that question convincingly, but still continue to say things like that, you're guilty of wishful thinking - just like a cancer sufferer who pursues unscientific alternative therapies because they don't like the side effects of chemotherapy.

  7. The Trump proposed tax cuts aint the same as National’s minching tax cuts of 8 years ago.
    Trump signals an end of Western Marxism in the dismantling of the “fair tax system”. Fair being everyone must have the same income regardless of how hard they work. A fair tax system designed around class warfare with the propaganda about going after the rich pricks but in reality it’s the plebs who pay through the nose.
    If Trump can end socialism through gutting the tax code then human behaviour will change. The cost of labour for eg is going to fall significantly.
    Get rid of the accountant who says the deficit will explode because revenue is down. Where are the Austrian economists who can explain what will happen to economy once the tax code is gutted? That is explain how people will react about keeping most of what they earn.
    And buy US$.


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