Much is being made about the incoming Trump administration’s infrastructure spending plan, as if this is a new invention. Capital stock upgrades are needed, that much is true. But they won’t dial up growth that much. U.S. President Barack Obama, if you remember, signed an $830 billion, 10November 16, 2016 6:04 PM EST
year infrastructure plan into law in 2009. It hasn’t exactly generated a
Last Updated November 21, 2016 11:59 AM EST
sustainable acceleration in growth, and at the current 77 per cent federal debt-
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to-GDP ratio, the laws of diminishing returns will come into even greater focus. This is not a very effective strategy to influence the contours of the business cycle, but it surely is needed to help underpin productivity, which has been in
its own recession for the past year-and-change. The real question is from where is the pool of skilled tradespeople going to come?
As for the personal tax cuts, what is strange is that the Trump plan, as it
stands, cuts taxes for everyone. The country simply cannot afford it. And the top 1 per cent of income earners see a 14 percentage point reduction in their tax rates; everyone else gets a four percentage point cut — the bottom-fifth receive the grand total of a one percentage point cent cut to their
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rates. This is bad economics and it is bad politics. Bad economics because what you want to do as a fiscal policymaker is to cut taxes the most in the segments of the population that have the highest marginal propensities to consume. This is how you get the biggest bang for the buck from an aggregate demand standpoint. The stock market seems to think that money grows on trees. But the reality is that a dollar borrowed today is a dollar sacrificed for economic growth in the future.
But how would Donald Trump know that? His economic team was filled with hedge fund managers. The plan is bad politics because one of the reasons for all the angst and anxiety is the gaping and record level of income inequality — not just about globalization and automation depleting the ranks of the middle class. Yet Donald Trump’s policies will merely exacerbate the income inequality in society, and this will set up for a very interesting battle with the left-leaning liberals in the Democratic Party in 2020 — the next election is only 1,448 days away. And Bernie Sanders’ message resonated during the primaries, of that there is little doubt. To top it all off, two-thirds of the income tax relief next year would be offset by the across-the-board tariffs that the president-elect said he would impose during the campaign. Now maybe he wasn’t being serious. Oops, I mean literal. Maybe nothing he said should be accepted at face value. But import duties had been part of his economic plan all along, and if implemented, will cost the consumer roughly $130 billion at the cash registers. In fact, what the working class will be left with is a negative income effect from all this, since it is the lower and middle class that buy most of their imported goods from places like China and Mexico. They certainly aren’t buying Italian suits, French perfume, Dutch chocolates or German cars.
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The stock market seems to think that money grows on trees. But the reality is that a dollar borrowed today is a dollar sacrificed for economic growth in the future. The debt-to-GDP ratio under the Trump plan goes from 77 per cent today to 105 per cent by 2026. Within a decade, the United States will look like a peripheral European country.
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I can understand fully the backlash against the Clintons, but I cannot believe anyone deliberately voted for fiscal ruin. Not just that, but Trump wants the Fed to hike rates. I mean, who does that? “Here, I’m going to raise trillions of dollars on new debt; please make it more costly for me.” No wonder he had that US$900 million carryforward that allowed him to pay no federal income tax — it’s because the King of Debt maybe adores it a bit too much. This is more than just probing the outer limits of deficit finance — it is sending the United States into a dangerously weak fiscal position.
Here is the rub, and the people deserve to know it. Under the Trump plan, debt-servicing costs, which now absorb seven cents of every federal revenue dollar, will drain 25 cents by 2020. In 10 years’ time, one-quarter of all revenues will go to service a debt load that will breach US$30 trillion under his watch, matching what will be devoted to Medicare at the time.
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I call that a travesty and my hope is that Paul Ryan is working off the same spreadsheet I am and comes to the same conclusion. This is more than just probing the outer limits of deficit finance — it is sending the United States into a dangerously weak fiscal position.
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To reiterate, it is 100 per cent true that monetary policy has hit the wall. That happened a while ago and is to be expected at the zero bound. The challenge is that fiscal policy also is tapped out and the multiplier impact
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subsides at ever higher debt-to-income ratios. We have long seen this in Japan. We are seeing it now in real-time in China, and to a large extent in Canada as well.
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In other words, there is no baton to be passed from monetary to fiscal policy. While the market does feed off this perception today, at some point reality will set in.
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David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave.
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