Economic nationalism harms US too
by Meghnad Desai
No incoming president could have asked to inherit a better economic legacy. The Dow Jones index has risen to new heights, unemployment is the lowest for many years and inflation is comfortably low. The cost of servicing US debt as a percentage of GDP is at one of its lowest points in the last 50 years.
However, the US economy is not as indestructible as Donald Trump may assume.It is beset by problems which are not reflected by the broad figures. The first of these is the gap in infrastructure spending, where America has not invested properly since President Dwight Eisenhower days (1953-61). There is a trillion-dollar need for renewal, which Trump has promised to address.
The second problem is stagnation in employment and wages in manufacturing. Incomes have risen in the services sector, but not in the industrial sector. Manufacturing employment began declining in the 1970s after the oil shock, but it fell only at a moderate rate. After 1990, the decline sharpened owing to Chinese competition, mirroring the US trade deficit with China.
This may prove much more intractable than Trump thinks. He has taken to what Americans call the ‘bully pulpit’ to pressure American firms to relocate domestically from foreign countries. Trump has pulled the US out of the Trans-Pacific Partnership. He has threatened to renege on the Nafta agreement. Canada and Mexico would suffer serious economic dislocation if this happened.
This sort of economic nationalism, which is fashionable in developing countries and parades in left wing clothes, is economically inefficient. If successful, it will put a serious cost on the rest of the US economy. Trump needs to invest in re-training former manufacturing workers who are now unemployed if his protectionist policy is to have any economic benefit. There is no sign as of yet that Trump has considered this.
Before the primaries began, the prevailing theme among economists was secular stagnation. If all goes well in the crucial first weeks of Trump’s administration, Congress will accept his ambitious spending policy when he submits his budget. Then the fear of secular stagnation can be forgotten.
Congress will grant Trump what he asks for, at the very least because infrastructure spending will be spread across the country. As House of Representatives members face elections in 2018, they will want quick results. That may work for the economy, for the president and for the re-election of Republicans in the House. ▪
Meghnad Desai is Emeritus Professor of Economics at The London School of Economics and Political Science. Back