A pre-election analysis by The Economist found Hillary Clinton’s fiscal plan to be “fiddly” but Trump’s to be “absurd.” Ironically, both candidates shared a common ground in their agendas: an expansionary fiscal plan to splash more red ink in public finance. The Economist reports that during Barack Obama’s presidency, the US national debt spiked from 35 percent of GDP to over 70 percent of GDP. It is estimated that Clinton’s plan would continue this trend to inflate the national debt-to-GDP ratio above 85 percent while Trump’s would make it even higher to 105 percent of GDP in ten years.
The two candidates also shared the same aim of beefing up America’s decaying infrastructure. The Clinton agenda promised an extra USD 275 billion over five years to return infrastructure investment near to its pre-recession level. The Trump Infrastructure Plan is more ambitious by pledging to fill up the USD 1 trillion funding gap in infrastructure investment over next ten years.
Why this shared fiscal aggressiveness? The current phase of economic expansion is in its 89th month since June 2009, making it one of the longest continuous growth periods in US history. The growth has, however, been slow and feeble. The per capita real GDP in 2015 was only 3 percent higher than its pre-recession level. The post-recession GDP growth in the past eight years has been 1.8 percent per annum, well below the annual rates of 2.65 percent in 2000-07 and 2.26 percent in 1981-99. Although unemployment rate has fallen from its recessionary peak 9.6 percent down to around 5 percent this year, it is still higher than the 4.6 percent level in 2006-07. More alarmingly, the employment-to-population ratio, currently about 59 percent, is way below the 63 percent level before 2008. The 4-percentage-point difference suggests that as many as 10 million jobless people could have been employed if the economy had recovered to the pre-recession status.
All those figures indicate that the US economy is yet to regain its full strength. When the economy is stuck below its long-run potential, the wisdom of Keynesian economics calls for government intervention. Eight years ago, the world avoided a Great Recession of the scale and length of the 1930s largely thanks to a globally coordinated intervention through massive fiscal pump priming and aggressive monetary loosening by the major economies. Despite that success, the US and other OECD economies are still languishing with economic frailty today. Frustratingly, their central banks have exhausted their monetary-policy ammunition. With policy interest rates near or even below zero bound, these economies are helplessly swamped in the liquidity trap. That leaves fiscal policy the only option.
The real danger of Trumponomics is thus not a fiscal fiasco that fails to create jobs and promote growth. The more worrying is the long-run environmental costs of a free-fracking pursuit of GDP growth.
As pointed out by Gavyn Davies of Financial Times, the intellectual climate in macroeconomics is shifting in favor of a “New View” for a fiscal policy that is more active and audacious. Advocates for such a “New View” include eminent economists affiliated with the Democrat campaign. They believe that the historically low levels of long-term interest rates make it less costly to raise public debt, leaving more room for deficit-financed government spending.
The bet on further fiscal pump priming has an additional shot of odds from the so-called Verdoorn’s Law, named after a Dutch economist who first coined the idea decades ago. Verdoorn’s Law suggests a positive causal relationship from the growth of output to the growth of productivity in the long run. According to that causality, the fiscal stimulus, in addition to returning the economy to full employment, may also boost productivity growth. Some recent work in the field provides renewed support to this notion. Paul Beaudry and Franck Portier, for instance, hypothesize the positive shock from the anticipation of a future productivity advance on current aggregate expenditure, including investment. In this scenario of expectation-drive business cycles, public investment in infrastructure that benefits future productivity growth would double its effectiveness via its added fillip to business investment.
These “new views” are of course not without controversy among economists. They nevertheless lend support to the claim that a colossal fiscal expansion is just what it needs to bring the US economy back to the pre-recession growth trend, or an even faster one, i.e. to “make America great again.”
Apart from its larger scale, a key feature that distinguishes Trump’s fiscal plan from Clinton’s is its massive tax reduction and simplification, especially the lowering of business tax rate from 35 percent to 15 percent. The sweeping tax cuts are likely to repeat the feat of Reaganomics in the 1980s: soaring budget deficit and public debt, as well as surging productivity growth on the supply side. Lifting regulatory restrictions on the energy industry and shaking away US responsibilities in the fight against global warming will certainly make that job easier.
The real danger of Trumponomics is thus not a fiscal fiasco that fails to create jobs and promote growth. The more worrying is the long-run environmental costs of a free-fracking pursuit of GDP growth. Shadows of damaging trade wars also loom large over the president-elect’s ambition to rebalance the US trade with the rest of the world. Can a shrewd billionaire-turned-President see these dangers?