16 November 2016
by Stephen Koukoulas
n the years since the global financial crisis, proposals from Nobel laureates and professors of economics for fiscal policy stimulus to boost growth have been met with widespread derision. This was mainly from the proponents of fiscal austerity, who can only see cuts to government spending as a solution to all economic ills, despite the moribund state of the global economy.
But such economic quackery is being called out by someone who, oddly, appears to the master of quackery, the US president-elect, Donald Trump.
What a turn-up for the books. But the Trump win and his economic agenda has exposed a critical problem for the progressive side of politics in Australia and around the world.
When a bombastic businessman, with a void of economic understanding, accidentally becomes president of the United States and indicates that he will oversee a fiscal stimulus based on an infrastructure and defence spending spree, there is a surging stock market, forecasts of stronger economic growth and all-of-a-sudden analysis that such policy stimulus is overdue.
As Basil Fawlty might say, “special subject, the bleeding obvious”.
It is intriguing to see the instant analysis from many unworldly Wall Street analysts and Washington thinktank specialists that the US economy will be strong because of the extra government spending Trump is outlining. The hypocrisy is breathtaking.
Not that long ago, the Obama administration and US government was brought to the brink of closure when the Republicans in Congress postponed the rise in the debt ceiling until the 11th hour because it judged fiscal policy to be too loose. They and their ilk demanded cuts in spending to address what was a moderate problem on the US budget even though economic growth was weak, unemployment was high and deflation pressures were building.
The US economy was held to ransom by the fiscal austerity economic pretenders and suffered as a result.
Having demanded a reduction in government debt from about 90% of gross domestic product a few years ago, there now seems to be an acceptance that a path of US debt to 120% of GDP – but under Trump and not Obama or Clinton – is great economic policy.
That said, there are other economic threats from the Trump policy agenda and these are not just to the rest of the world but also to the US economy. There is much more to Trumpenomics than the current focus on the fiscal stimulus measures.
Even if the Trump proposals for a preposterous 45% tax on Chinese imports and the accusations of currency manipulation are watered down, there is little doubt that Beijing and other capitals hurt by any rise in US trade restrictions would retaliate in kind.
US companies might encounter difficulties in a world where trade flows are inhibited. US businesses make more than $2tn a year from their overseas operations and, if their access to global markets is constrained, this figure would obviously be under threat.
For every job saved in the US from import restrictions, there may well be a different one or even two jobs lost from damage to US exports, trade and investment.
For years now, the Australian Labor party and other progressive left parties around the world have been too scared to strongly argue the case for an increase in the size of government, including higher spending, as they have been hamstrung by fear of the political difficulties. This has also been evident in the agenda when trying to make a case for, let alone implementing, policies that redistribute income from the well-off to the less well-off.
But it appears that Trump is about to trump the left on the issue of fiscal stimulus as a virtue for growth. If only the Democrats had made the case in the immediate aftermath of the financial crisis, the US economy would have been stronger, the disaffected voters would have been less inclined to swing to Trump and Hillary Clinton would likely be president.