You can tell a political ideology by its tax-and-spend policies. The two far extremes of the English-speaking political world – the new US populist right and the old UK corporatist left – are fashioning very different fiscal programmes. Might Post-Thatcherite Mrs May be the new Middle Way?
The wealth of a nation
In an interview with The Economist last week President Trump stated that his overarching economic goal is to raise the US growth rate to a giddy three percent. That is the only way to bring more Americans into well paid employment and to secure the fiscal foundations of a massive new infrastructure programme and increased state spending.
Back in the day – indeed from 1945 to the first oil shock of 1973 – that goal would have seemed reasonable by American standards. But, on the basis of the last ten years since the financial crisis, three percent seems optimistic – being one percent higher than the rate that most economists think is sustainable.
In fact, in his book The Rise and Fall of American Growth, Robert J Gordon, professor of economics at Northwestern University, argues convincingly that the trend growth rate in the US has been in long-term decline since as far back as the 1870s. These long-term trends are difficult to reverse.
So how will President Trump achieve what has eluded previous administrations and re-dynamise America? He offers four main policy prescriptions.
Trumponomics for dummies
The first is to secure “fairer” trade deals with America’s trade partners. Trade is “fair” when trade flows between two countries are in balance. Further, in the spirit of economic nationalism, companies which invest at home will be rewarded and when they invest abroad they will be punished. This is not necessarily a repudiation of free trade – but it is a policy of America First.
Expect a certain amount of arm-twisting ahead. In practise, America’s neighbours Canada and Mexico are likely to get bullied more easily than the real surplus monkeys: China and Germany. Mr Trump is no longer going to withdraw from NAFTA but simply intends to renegotiate – “massively”. He has wicked Canadian dairy farmers in his sights, amongst others.
If the level of tax on company profits in the USA could be cut to a level of 15 percent – as already mooted by Treasury Secretary Steve Mnuchin – that would very likely result in the repatriation of trillions of Dollars of corporate cash.
And even in the unlikely event that Mr Trump could whip the Germans into exporting fewer Audis and importing more Boeings, there would remain another fundamental imbalance. That is that the Americans save less and therefore invest less than the Germans do. And a hike in domestic capital expenditure, short-term at least, would probably result in larger trade deficits – as was the case during the Reagan boom of the 1980s. Any attempt to address trade imbalances by the imposition of protectionist tariffs would be most likely reciprocated. In conventional economic thinking, that is lose-lose.
Second, the Trump administration will cut taxes – both personal and business taxes. This will stimulate (so the standard supply-side argument goes) entrepreneurship and therefore employment.
It is certainly true that America’s tax on company profits, at 35 percent, has been out-of-line with other advanced economies (it is currently 19 percent in the UK and heading south). This has had the result that a number of giant American multinational corporations – not least Apple (NASDAQ:AAPL) – have chosen to book their profits in countries like Ireland (where the corporation tax rate is 12.5 percent) and to maintain huge cash balances in offshore jurisdictions. Apple alone is thought to have an offshore cash pile of some US$ 260 billion.
If the level of tax on company profits in the USA could be cut to a level of 15 percent – as already mooted by Treasury Secretary Steve Mnuchin – that would very likely result in the repatriation of trillions of Dollars of corporate cash (as well as intellectual property) back to America. This could be used to finance new projects; and, best of all, it could be taxed – especially if it were spent in the form of executive bonuses.
Third, the President will eliminate stifling regulation. Mr Trump has signed an executive order requiring that federal agencies must scrap two rules for every new one that they introduce. But a lot of these rules relate to environmental protection. The appointment of a climate change sceptic known to favour the resurgence of coal mining to head up the Environmental Protection Agency reveals where Mr Trump’s sympathies lie.
Fourth, he wants to counter illegal immigration – but apparently legal immigration by highly skilled workers is still OK. Most British Conservatives would agree.
Critics of Trumponomics, in so far as it is a coherent programme, offer numerous objections.
First they say that massive tax cuts will benefit the rich most and that therefore social inequality will only widen. And a lot of the extra disposable income might be spent on foreign imports (e.g. more Audis). Second they fear that the Federal budget deficit, already massive, will swell further, causing America’s US$20 trillion[i] of national debt to accelerate away. Third, there is a fear that the massive repatriation of capital from abroad will actually stimulate inflation as the money supply increases. That would undermine living standards and America’s international competitiveness.
Economic nationalism, so the argument goes, will only speed automation since firms unable to outsource component manufacture (or whatever) to cheap-labour Mexico will be incentivised to robotise.
Another objection is that most of the downward pressure on wages, especially for unskilled jobs, is coming, not from cheap foreign imports, but from good old American technology. As elsewhere, employment in the retail sector in America has plummeted as Americans have been drawn by the lure of Amazon.com (NAZDAQ:AMZN) and other online retailers.
Economic nationalism, so the argument goes, will only speed automation since firms unable to outsource component manufacture (or whatever) to cheap-labour Mexico will be incentivised to robotise. Good news for robot manufacturers, no doubt; but not great news for the great American working class who voted for Mr Trump.
Ructions in Washington
Unfortunately for Mr Trump, the markets right now are being driven, not by his fiscal stimulus plan, but by the increased political infighting since the President saw fit to fire the head of the FBI, James Comey, on 11 May. He is now to be the subject of a special investigation by the Department of Justice.
This week the VIX – the index of volatility of the New York market, or if you like, the cost of insurance in the form of call and put options – has risen significantly, while on Wednesday the market fell by two percent. With more talk about obstruction of justice being an impeachable offence, the Trump reflation trade is giving way to fears of a market correction.
Furthermore, the US markets expect the Federal Reserve to raise interest rates again in the near future. A major market retreat could induce the Fed to postpone that hike. That would negatively impact the US Dollar, which has been losing ground of late. Late on Thursday afternoon (18 May) the Euro was worth US$ 1.11 – a six month high – and the Pound breached the psychologically important US$ 1.30 level for the first time since September.
Personally, I don’t think that the President’s shenanigans within the Washington machine will result in his impeachment. Although he has allowed a cloud of suspicion to become rank, it would be very hard to prove that he has done anything illegal. Mr Trump’s supporters elected him knowing that he was an indiscreet outsider whose job was to drain the swamp and whose catchphrase was: You’re fired! They knew they were not electing a silver-tongued diplomatic schmoozer with nice manners.
On the other hand, it is quite possible that the Trump administration might now retreat into a state of siege where, constantly under attack from enemies in the Democratic Party and from within the Republican Party itself (nota bene Senator McCain), the President and his few trusted acolytes barricade themselves behind the city walls. In such a state of affairs (to switch metaphors) all the business of government will get stuck in the logjam.
Mr Trump, in extremis, would then appeal directly to his core supporters on the ground. The quality of American democracy could be damaged even more than the economy. But we are not there yet. A Republican-dominated congress is unlikely to deny Mr Trump his tax cuts – barring further catastrophes. Trumponomics may yet surprise us.
Meanwhile, back at Labour HQ…
Messrs Corbyn and McDonnell who formally launched the much-leaked Labour manifesto on Tuesday, 16 May do not start, like Mr Trump, with the premise of raising GDP growth. In fact they have relatively little to say about growth at all. Rather they start with the issue of social equality and opportunity (as they see it) and work back from that.
I shall spare my time-poor readers the intricate details of the Labour manifesto’s massive spending commitments, re-nationalisations and benefit hikes and just focus on two aspects of Corbynite Labour economic policy. These stand out in contrapuntal distinction to the core tenets of Trumponomics (as one would expect).
Labour’s claim that a Tobin tax will raise £26 billion a year is fantastical on two levels. Firstly, it is based on supremely dubious figures about transaction volumes. Second, that figure is more than the top six UK commercial banks’ total profits last year.
First: corporation tax. At precisely the moment that President Trump’s administration is about to slash company profit tax in the USA from an egregious 35 percent to a possible 15 percent, the Labour Party wants to hike corporation tax in the UK. Moreover, we know that President Macron of France believes that France’s rate of tax on company profits is too high, and we suspect that he favours a standard rate of company tax across the Eurozone of about 25 percent. So this is not a great time to make the UK a less attractive investment destination.
Higher corporation taxes reduce retained earnings and therefore business investment and put downward pressure on wages. As recently as under Prime Minister Brown’s government the likes of the advertising giant WPP (LON:WPP) fled the UK and relocated its management office in Ireland, only to return given the Coalition Government’s more constructive attitude to corporation tax. In a globalised world (and Labour supports globalisation) companies can up sticks and migrate to wherever they want. The digital economy makes that pifflingly simple.
Second: the Financial Transaction Tax (FTT) or Robin Hood tax, or, for you economists, the Tobin tax (named after the late economist, James Tobin). This is proposed as a levy on all financial transactions. Now this is not a stupid idea and has actually been around for some time. The tax system in the UK is anomalous in so far as stamp duty is levied on the purchase of some financial assets but not others. So if you buy shares, you pay stamp duty of one percent; but not if you buy bonds or exchange-traded derivatives contracts such as equity options or bond futures.
But, as James Tobin argued, a Tobin tax only works if everybody decides to implement it. If there is a Tobin tax on a foreign exchange trade in London, and none in Dublin, the dealing rooms will simply (notionally at least) relocate to Dublin. Much as every time you buy a trinket on Amazon.com in the UK, even if it shipped from Amazon’s splendid facility on the A5, it is booked in Luxembourg.
It would seem particularly inopportune to impose Tobin taxes on the City of London trading floors (much as I have been rude in the past about the red braces who inhabit them) at the very moment when Brexit is putting bank expansion plans on hold. This would surely play into Monsieur Macron’s hands: he has declared his wish to poach every possible City job to Paris. And he has no plans for a Tobin tax.
Labour’s claim that a Tobin tax will raise £26 billion[ii] a year is fantastical on two levels. Firstly, it is based on supremely dubious figures about transaction volumes. Second, that figure is more than the top six UK commercial banks’ total profits last year. So at a time when banks are supposed to be re-building their capital cushions, they will in fact be sucked dry of retained earnings.
Now the Tory manifesto, it seems to me, steers a perilous course between the Scylla of Trumponomics and the Charybdis of Corbynitis. It is actually a somewhat, well, conservative, programme: reeking of distant fiscal discipline and well-intentioned fiscal tweaking. It might even be described as unambitious by those who are not well disposed to Mrs May and her mission. Of course, the main theme of the UK election campaign is not really fiscal policy at all – but rather the more autochthonous yearning for strong and stable leadership.
The most important feature of Mrs May’s agenda, as exemplified in this document, is to move the Tories onto the centre ground vacated by a hard-left Labour Party and to pitch an offer to the Just-About-Managing (what Boris would call the Lower Middle Class) and to the downright hard-up.
The Tory manifesto, it seems to me, steers a perilous course between the Scylla of Trumponomics and the Charybdis of Corbynitis.
Not everyone on the right is pleased by this land grab, despite the political logic that it will – together with advances in Scotland and Wales – restore the Tories as the One Nation party. Jeremy Warner, writing in The Telegraph on Wednesday[iii], was scathing. He is sceptical, as am I, of the Millibandesque imperative to control utility prices and board room pay; to impose worker-directors on boards, and to reinstate virtually all aspects of EU regulation, from which we shall be theoretically be free by 2019, in the form of a Great Repeat Bill.
Of course, Brexit has skewed everything – even economic and fiscal policy. Most of the anti-globalists who voted Leave last year aspired to a free trade agreement with Europe; even though we now think it most probably unachievable. And the Europeans, under the Plan Macron, will close their borders to third parties – just as Mr Trump will (if he survives).
We now understand, though, the shape of Post-Thatcherite economic policy. Contrary to what The Lady once said, there is such a thing as society – and capitalist ones which embrace free trade are much richer.
Of the three confections on offer only one, in my opinion, has a reasonable chance of success.
[ii] This figure has been widely quoted but I couldn’t actually find it Labour’s manifesto, available at: http://www.labour.org.uk/page/-/Images/manifesto-2017/labour-manifesto-2017.pdf
[iii] May’s move to the Left may be clever politics but it’s not what Britain needs, Jeremy Warner, The Daily Telegraph, Wednesday, 17 May 2017, page B2.