Sunday, 16 April 2017

Trumps Economic Plan - Will it Serve those who voted for him?

Trump’s Economic Vision

For years, the perception and truth of how Government and Corporations had been working in collusion at the expense of the working and middle classes had reached breaking point. The economics were to stark to ignore with all mainstream parties now being forced to talk about the need to address the growing extreme wealth inequality and those ‘left behind’ by what was argued to be the neo liberal flavour of Capitalism with its focus on global trade and the off shoring of jobs to the detriment of US workers.

In the recent US Presidential elections, the stage was set for a truly independent and establishment outsider to reclaim the ground lost for the ordinary American. A candidate that would put the US worker above all else and return jobs and growth to the US economy and take on the big corporations and make it economically unattractive for them to operate outside homeland borders. The vision is popular and helped draft the political novice Donald Trump into power, but the question is whether he has a viable plan?  

To put the background of wealth inequality into context, two key points must be stated. Wealth inequality is both inevitable and necessary to promote the incentives for economic agents to strive and seek higher levels of material wellbeing. It has been argued that globalization has reduced absolute poverty for millions, although the methods used to quantify what this is are heavily contested amongst theorists.

However, a consensus amongst the economics community has developed over the need to redress extreme wealth inequality were the very wheels of economic growth start to slow and absolute poverty starts to increase, a situation which is unsustainable and ripe for civil unrest in the long term.
The recent elections saw this topic a dominant theme amongst candidates. Trump for instance stated the need to provide more to the ordinary worker to help prosperity reach everyone and not just the 1% at the top as shown by the recent Oxfam report. In his words,

"In order to achieve the American dream, let people keep more money in their pockets and increase after-tax wages."

The question then is what is his plan and can he deliver on his promises? Or more importantly, can Capitalism as a whole deliver a system which is both sustainable and inclusive?
Looking at Trumps economic plan, three dominant themes can be assessed.
  •       Tax & Trade Policy
  •        Reducing Regulation
  •        Infrastructure Spending

The strategy is not fundamentally new and is categorised under the general rubric of Supply Side Policies and the idea is that the best way to help everyone is to make it easy for those engaged in the supply of goods and services to produce and this ultimately leads to wealth reaching those at lower levels through a process dubbed ‘trickle down’. So when companies are allowed through lower taxes and less regulations to innovate and produce better and cheaper products, such as iphones, and this spurs the incentive to work and boosts demand for such items and that spurs job creation and everything falls into place for everyone and not just the 1% at the top.

This approach of starting with helping the suppliers was initially advocated by the 18th/19th Century economist Jean-Baptiste Say from whose work the term Say’s Law originates which purports that fixing the economy from the perspective of supply (producers) will take care of everyone ultimately and the opposite approach, of directly empowering those at the bottom (through initiatives like minimum wage) as advocated by the Democrats and the Clinton campaign as a less effective strategy.

Tax & Trade Policy

On tax, Trump has called for massive tax cuts for all income groups with a particular focus on those at the top and for Corporate taxes to fall from 35% to 15% ! The idea is that consumers will have more money to spend and also corporations will have more budgets to develop more exciting goods and services. Although the short term will see a growth in the deficit (the difference between what the government spends and raises in taxes) but the believe is that if growth increases significantly as a result, more taxes will be recovered and the budget will return to surplus as happened in the Clinton years.

On international trade and US companies that have taken jobs to low income countries like Mexico and China, Trump seeks to make it unattractive for them to continue to do so by using the carrot of lower taxes at home and the stick of imposing large import duties to negate the cost saving of off the initial off shoring of production which stared and continued from the neoliberal brand of Capitalism under Ronal Reagan and Margaret Thatcher in the UK.

Regulation

On regulation, it is clear that Trump views the rules set out to protect the environment and the excesses of the financial markets are mere inconveniences and obstacles to growing the economy. This prompted him to sign an executive order requiring federal agencies to cut two existing regulations for every new regulation they implement.
Regulations are in his view a straight jacket which are impeding the competitiveness and making the US less able to compete globally. This explains why he believes that global warming is a hoax and that rules to protect the environment need to be scrapped.

Infrastructure Spending

Trump has stated that the country’s infrastructure is crumbling and needs to be overhauled if the country is to compete globally.

His campaign put forward a vision that would leverage “public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.” [1]
With the engagement of the private sector, his campaign claimed that the spending would not be taking anything from the tax payer (ie would be revenue neutral) and thus a major bonus to help the economy become more competitive and this would help with jobs and growth.

Can these policies work?

As mentioned, the central them of these supply side policies is the belief in trickledown economics but as the history of implementing this approach show, you have in effect a trickle up effect. Under the golden age of supply side policies under Reagan in the 1980s wealth disproportionately trickled up to the elite margin of the economy and although some of the fruits reached the average American, that trend started to reverse with growing rates of absolute poverty due to the extreme levels of this wealth inequality.

Lower taxes are an appealing selling point but studies show that many of the bottom earners, ex single parents, will be worse off as a result. Also, cutting taxes on the lower income groups is far more effective in creating jobs as lower income groups are far more likely to spend on basic consumer items unlike the top earners who are more likely to employ higher profits into off shore tax havens and engage in riskier financial activities that typically end up causing large tax burdens that are paid back by the ordinary workers through higher income taxes and less welfare payments.

Furthermore, many of the jobs that have been lost offshore are low paid and labour intensive in nature and with the increasing pace of technological unemployment, it is very questionable if such jobs would be made available to human labour as opposed to being automated.

As for regulations, the financial crisis of 2008 was largely as a result of the relaxing of regulations, in particular the financial services modernisation act of 1999 which dropped the old rules (Glass–Steagall Act of 1932) that prevented retails banks getting involved in high risk gambling activities (usually the realm of investment banks like Goldman Sachs) with money tied up with house purchase bring the entire economy into the sphere of insolvency; something which hadn’t been seen since the great depression of the 1930s.

As for infrastructure spending, it is telling that the projects chosen are not defined by what the country needs (although if that is achieved it’s coincidental) but by what brings further tax cuts and revenue streams for firms and investors. According to the scheme, private contractors have power over project selection. This makes public benefit, through job creation and the boost that the construction industry desperately needs, subservient to profits for the firms that chose projects such as those providing tolls and a share of energy bills.

The fundamental problem with these visions that keep cropping up in the debate in the West, whether one considers both extremes of the current discourse between left wing (demand side) or right wing (supply side) is that they fail to address the root cause which is how wealth has become an asset which doesn’t circulate fairly throughout all sections of the economy and instead has become a circuit amongst the elites who control policy and gear the rules of the game to maintain the status quo and only talk of policies to redress the inequity when the fear of rebellion and uprising surface as has happened in recent years.

Allah SWT warns us of this when he states in Surah Al-Hashr :-

And what Allah restored to His Messenger from the people of the towns - it is for Allah and for the Messenger and for [his] near relatives and orphans and the [stranded] traveler - so that it will not be a perpetual distribution among the rich from among you. And whatever the Messenger has given you - take; and what he has forbidden you - refrain from. And fear Allah ; indeed, Allah is severe in penalty.
TMQ 59:7

The Islamic economic model is not built on the false narrative of just increasing growth in the hope that this will benefit all sections of the society, rather it seeks to achieve the best of both world in achieving a growing (real) economy with value adding jobs and at the same time has safeguards to ensure that wealth is not pulled into an elite sub economy as has been seen under all flavours of Capitalism, both left and right. So the answer to the question is no, Trump’s plan will not help those that voted for him. The sad thing is that it will waste another 1 or 2 terms before this is apparent.











[1]http://thehill.com/policy/finance/311721-questions-hang-over-trump-plan-on-infrastructure

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