Business | Trump’s economic policies ‘cut in both directions’

Trump's economic policies 'cut in both directions'

The second of a three-part series looking at the possible direction of the US economy under Donald Trump. Gary Clyde Hufbauer tells Orla O'Sullivan there are grounds both for optimism and pessimism with regard to whether or not productivity can be boosted

January 5, 2017 1:15 PM (UTC+8)
Donald Trump has talked of injecting US$1 trillion into infrastructure spending. Photo: AFP
Donald Trump has talked of injecting US$1 trillion into infrastructure spending. Photo: AFP

US President-Elect Donald Trump’s “policies cut in both directions,” says Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, DC, in assessing the likelihood that a Trump administration will boost productivity.

US productivity has been growing at a slower rate than in past decades and slower, certainly, than Asia’s.

Into the plus column goes the likelihood of lower corporate taxes, fewer regulations and investment in infrastructure, plus more spending on military research to create a ripple of innovation across industry.

The minus column is topped by trade protectionism and anti-immigrant rhetoric expressed during Trump’s election campaign, which raises concern that scientific research may be hampered by a lack of international collaboration. Then there’s certain research shelved for political reasons — if research generally is not cut to pay for other costs.

Hufbauer says he is “cautiously optimistic regarding infrastructure” and “definitely optimistic regarding tax cuts,” but “trade is a negative.” He spoke before Trump’s December 22 appointment of someone widely described as a China critic to head the newly created White House National Trade Council, Economics Professor Peter Navarro.

Trump has talked of injecting US$1 trillion into infrastructure spending, on which, Hufbauer said, the US is below average.

High priorities

“I’ve been told in a briefing they will focus on the real, high priority projects,” not the ever-possible bridges to nowhere, he added. He anticipates, improved roads and airports in big cities, oil pipelines being approved and transmission lines to bring renewable energy from Oklahoma and Texas to California.

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United States base budget R&D by agency, in billions of dollars, financial year 2017. From the American Association for the Advancement of Science’s Guide to the President’s Budget.

Hufbauer shares an expectation that Trump will lower US corporate taxes, the third highest in the world. Some hope that will encourage US corporations to repatriate some of the estimated US$2.5 trillion parked abroad. “Reduce taxes and you’ll also get a boost in productivity,” he says.

On trade, Hufbauer says, “Trump only likes exports, but as an economist, I believe cheap imports drives productivity by forcing US firms to compete.”

The exchange must be of ideas, not just goods — especially since Asian countries, particularly, have surpassed the US in research and development. “It’s not all invented here,” Hufbauer says, adding, there’s “regrettable” resistance to foreign firms investing in the US.

Attracting foreigners and educating Americans with the right skills is a political topic unto itself.

“Trump only likes exports, but as an economist, I believe cheap imports drives productivity by forcing US firms to compete”

“Skepticism is in order about assertions that current visa policies are critical for US ‘innovation,’” said Michael Teitelbaum, a fellow at Harvard Law School and author of Falling Behind?: Boom, Bust and the Global Race for Scientific Talent.

One safe bet in a Republican-led Congress is an increase in military spending, but does that automatically mean more spending on R&D and, from that, a broad economic boost?

Tina Jonas, a military and aerospace expert at the Center for Strategic and International Studies, in Washington, DC, believes so.

Jonas who served as comptroller undersecretary of the Department of Defense, 2004 to 2008, anticipates an additional US$5 billion to US$10 billion for military R&D this year. The Obama Administration had budgeted for US$2.9 billion.

Last year’s US$75 billion in R&D from a defense budget of “roughly US$600 billion” was typical. “The Department of Defense usually spends about 12% of its budget on R&D,” Jonas said. Defense overall accounts for more than half of all discretionary spending by the US government.

The business approach

How the department is run will be “perhaps much different than other administrations. I expect more of a business approach,” she added, saying that the appointment of a Wall Street executive as secretary of the army signals that additional R&D will be funded largely by cost savings.

How will Trump pay for other campaign promises?

One reduced source of income is likely to be regulatory fines. Bank fines alone since the 2008 crisis have totaled more than a quarter of a trillion dollars. Bank stocks have been outperforming others on the New York Stock Exchange since the election, which many attribute to the impending removal of financial reforms enacted by the Obama Administration.

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Federal R&D as a percentage of GDP. From the American Association for the Advancement of Science’s Guide to the President’s Budget.

Larry Tabb, founder of financial research firm Tabb Group, observed, “If you look at the people Trump has appointed to his cabinet, most are against the regulations their divisions implement.”

There could be domestic business boosts and international friction as consequences of Trump calling climate change “a hoax” and threatening to pull out of international accords.

“It’s always a trade-off. If you don’t care about the environment, can you increase productivity? Sure. But will Trump’s policies get us back to 4 percent GDP, as he says? No”

“It’s always a trade-off. If you don’t care about the environment, can you increase productivity? Sure. But will Trump’s policies get us back to 4 percent GDP, as he says? No,” said Jim O’Sullivan of High Frequency Economics.

The Information Technology and Innovation Foundation in Washington, DC, focuses on policies to spur innovation. Founder Robert Atkinson, who served in both the Clinton and Bush Administrations, said both major US parties have their research blind spots. Republicans, for example, may avoid embryonic stem cell research.

“The biggest threat is a cut to R&D overall, if fiscal conservatives dominate the new Administration,” he said.  

And politicians of all stripes have to drop their populist stance of backing robotic research only for robots to support rather than supplant human workers.

The US should increase tenfold its $60 million annual funding of the National Robotics Center and set about automating services, he said, “because that’s where most of the workforce is.”

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