The chances of Trump pursuing an economic stimulus that will benefit the lives of those he promised to help are slim.
Republican presidents have a penchant for ditching their ideological commitment toward small government, turning into big deficit spenders soon after assuming office.
Ronald Reagan’s legacy owes a great deal to his spectacular U-turn from admonishing federal government largesse to enlisting it enthusiastically, and with considerable effect, against America’s early 1980s recession.
Understandably, Mr Trump’s references to infrastructure and defense spending lifted markets desperate for a sign of some silver lining, causing many to speculate that the new president-elect may turn out to be America’s next great Keynesian leader.
While it is impossible to predict the economic consequences of Mr Trump’s tenure, given his strategic preference for vagueness over policy detail, one thing is clear: any mention of Trump as a Keynesian president, just as in the case of Ronald Reagan, confuses “Keynesian” for “irresponsible” and generates expectations unlikely to be fulfilled.
Deficit spending can take one of three forms: tax cuts, spending increases or a combination of the two. Republicans, from Ronald Reagan to George W. Bush, and now clearly Donald Trump, favor large-scale tax cuts while concentrating additional spending on defense procurement.
If the objective is to provide a flagging economy with necessary stimulus, Republican deficit spending is a most inefficient means. John Maynard Keynes, who had no love lost for the working class, and harbored a keen interest in promoting the wellbeing of aristocratic folk like himself, nonetheless objected to large-scale tax cuts for a simple, practical reason: the trickle-down effect is a myth, to put his point in Reaganite language.
The reason that “trickle down” is a myth is that the rich are most likely to save a large part of the tax relief they receive, thus blunting its stimulus potential, or use it to go skiing in Switzerland, rather than to spend it in their demand-deprived community. This is why targeted spending on the poor was the British gentleman’s recommendation: because it stimulates demand much more efficiently.
Then there is the question of when, and how much, to indulge in deficit spending. There is a tradition amongst Keynes’s detractors, especially in the United States, to present him as a sponsor of unconditional, the more-the-merrier, deficit spending.
Nothing could be further from the truth. Keynes advocated deficit spending only under conditions of low demand, low investment, high unemployment and next-to-zero interest rates—in other words, under the circumstances that prevailed in 2009, when Republican lawmakers were opposed tooth-and-nail to deficit spending.
Under all other circumstances (for example, when unemployment is low and interest rates on the rise) Keynes would have cautioned against deficit spending. Indeed, he believed that once the economy rebounds, governments should shift their budget into a surplus.
Republican spending undermines Keynesian stabilization
Deficit spending is undoubtedly an important tool for stabilizing the U.S. economy, as it is for any relatively closed economy fortunate enough to have its own central bank. By the same token, austerity drives to eliminate deficits, especially during periods of low investment and falling prices, are a recipe for disaster.
But for deficit spending to play its stabilizing role, it must be used as a tool for boosting existing spending rather than for maintaining chronically unfunded spending. And here is the rub for the American economy.
Since Ronald Reagan’s conversion to big deficit spending, the U.S. federal budget is in a state of disrepair. Federal taxes amount to around 18 percent of the national income. But the federal budget only for defense, health and social security comes to 17.7 percent, not even counting the annual interest payments on the federal debt that, under the current ultra-low interest rates, requires 1.5 percent of national income.
This leaves the federal budget with a small deficit of 1.2 percent even before we factor in everything else the federal government must, and does, pay for: public infrastructure (roads, bridges and trains), biomedical and scientific research, education and training, courts and prisons, plus research and development (R&D) in green energy and technologies. All these essential expenditures are paid for, year in year out, by borrowing.
While it would be suicidal to try to balance the U.S. federal budget via austerity measures most likely to push the economy back into recession, it is clear that the room for using deficit spending to stabilize the economy is severely limited. And it has become so terribly limited because of Republican practices that have been confused, often intentionally, for Keynesian economics.
Mr Trump’s unlikely conversion to common-sense economics
For deficit spending to become a stabilizing factor in the United States, it must be accompanied by a determined effort by the Internal Revenue Service to exercise its right to tax corporations (for profits on intellectual property rights developed in the U.S. but whose returns are idling untaxed in tax havens including Ireland) and by the Treasury Department to end the tax immunity of the top 1 percent (as Warren Buffet, and others of that class, have advocated). If this does not happen and, instead, we get more unfunded tax cuts and defense spending, the interest rate on federal debt will rise and the room for stabilizing deficit spending will be further curtailed.
It is also crucial that the money spent on stimulating the economy and returning hope to the “discarded” blue-collar workers and the debt-laden graduates must go into value-adding activities. Additional government expenditure will accelerate growth in things humanity and the planet need more of if it is directed to public goods and R&D in green technologies, accompanied by new emission-penalizing regulations.
Do these sound like policies that a Trump stimulus package is likely to include? While even irrational hope is often useful, the prospects of Mr Trump emerging as the next Keynesian President are slim.
Yanis Varoufakis is co-founder of the Democracy in Europe Movement DiEM25 and the former finance minister of Greece.