Donald Trump and the poisoned chalice of the US economy

[Michael Roberts Blog, 11-9-2016]

The ironic thing about the (narrow) victory of Donald Trump in the US presidential election is that their ‘safe’ candidate has lost it for the Democrats, Wall Street and the strategists of capital.  Now they are lumbered with a loose cannon that they must try to rope in.

Trump has won because a (just) sufficient number of people are fed up with the status quo.  Apparently 60% of voters asked at the polling booths reckon that the country “is on the wrong track” and two-thirds were fed up and angry with the Washington government – something Clinton personifies.

Like the vote of the Brits for Brexit, against all expectations, a sufficient number of voters in America (mainly white, older and in small businesses or working in failing industries in smaller central US states) have overcome the vote of the youth, the more educated and better-off in the big cities.  But remember hardly more than 50% or so of eligible voters turned out to vote.  A huge swathe of people never vote in American elections and they constitute a sizeable part of the working class.

Most significant, the most important issue (52%) for voters, when asked at the booths, was the state of the US economy, with terrorism next (but well down at 18%) and immigration (the Trump card) even lower.  Trump won because he claimed he could improve the conditions of those ‘who have been left behind’ by globalisation, failing domestic industries and crushed small businesses.  Of course, Trump is a billionaire and has no real interest or idea about improving the lot of the majority.  But anger at the establishment was sufficient (just) for this egoistic, misogynist, sexual predator, rich man’s son to win.

But it is still the economy, stupid.  Trump has been handed a poisoned chalice that he will have to drink from: the state of the US economy.   The US economy is the largest and most important capitalist economy.  It has performed the best of the largest economies since the end of the Great Recession in 2009. But its economic performance has still been dismal. Real GDP growth per person has been only 1.4% a year, well below levels before the global financial crash in 2008. It’s a story of the weakest economic recovery after a slump since the 1930s.

The IMF now expects the US economy to expand at only 1.6% this year.  And the US Federal Reserve bank economists are now forecasting just 1.8% a year expansion for the foreseeable future.   And all this assumes no new economic recession.

The majority view of economists is that a US recession is unlikely and that the economy will pick up again next year.   Indeed, US Federal Reserve chair Janet Yellen (whose job is now in jeopardy), reckons that the US economy “is on a path of sustainable improvement.”  The argument goes that the cost of borrowing is near zero, the American consumer is still spending robustly, the housing market is picking up and retail sales are still motoring.

But what is important for the health of a modern capitalist economy is not the ease or cost of borrowing, it is the level and direction of the profitability of capital, total business profits and the impact on business investment.  When profitability falls, eventually total corporate profits fall and then some time later, business investment will contract.  When that happens, an economic recession soon follows. In the post-war period, a sustained fall in business investment has led the economy into slump on every occasion, while personal consumption stays more or less stable, the latter only falling once the slump is underway.

And US corporate profits are falling.  According to economists at investment bank JP Morgan, US corporate profits declined 7% over year-ago levels.  On that basis, they reckon, “the probability of a recession starting within three years at a startling 92%, and the probability within two years at 67%”.  Moreover, the Federal Reserve is planning to hike its policy interest rate right after the election, because it claims the economy is returning to ‘normal’, increasing the risk of triggering a slump – although a Trump victory will put that off as stock markets plunge.

What is Trump’s solution to all this?  His economic proposals boil down to cutting taxes, reducing government spending and taxing imports to ‘protect’ American jobs.  The main beneficiaries of his tax cuts would be the very rich.  Under Trump, most people would see their income tax bill reduced by about 7%, but savings for the top 1% would be 19% of their income.  To balance the federal budget, government spending would have to be cut by about 20%, hitting welfare, education and health.  Raising tariffs on foreign goods and imposing punitive sanctions on China and Mexico, America’s two largest trading partners, would drive up prices and provoke retaliation.

In one way, the next US president faces a worse situation than Obama did in 2009 at the depth of the global financial crash.  This time there is no way to avoid a slump by printing money or cutting interest rates; or by increasing government spending when public sector debt has already doubled to 100% of GDP.  Those economic policy tools have been used up.  The chalice will have to be sipped.