Economists warn Trump’s supporters could be hit hard by 'Trumponomics'

Economists warn President-elect Donald Trump's working-class supporters could be the biggest losers of his economic policies.

Atmosphere on election night on November 8, 2016

Atmosphere on election night on November 8, 2016 in New York City, NY, USA. Source: AAP

As the dust settles the week after Donald Trump’s shock win in the United States, it’s becoming increasingly clear that it was a late swing from white working-class voters in Midwest rust belt states which put him over the line.

But those voters – who have been struggling in a country with sluggish real wage growth – could be the biggest losers from a Trump administration, economists warn.

Matt Sherwood, Head of Investment Strategy with Perpetual Investments, that Trump's campaign fed the myth that trade and immigration were responsible for the pressures on working-class Americans. 

It’s not true, he said, but Trump had no difficulty in getting people to believe it.

The President-elect promised an era of American economic resurgence, driven by lower taxes and massive infrastructure spending.

“The interesting thing about the policies advocated by Trump – to lower corporate taxes, to give less healthcare support and to reduce population growth through tighter immigration controls – the primary beneficiaries are those who own assets, those who are better off,” he said.

“This isn’t an unemployment story.”
It’s an analysis reflected in the share market – which after – performed with unexpected strength the morning after election night.

“The higher income earners are the real beneficiaries of 'Trumponomics', even though it was the forgotten Democrats who actually elected him,” he said.

Doctor Sam Wills, economist with the University of Sydney, told SBS despite Trump’s rhetoric, unemployment in the US has dropped significantly since President Barack Obama came to power at the height of the recession.

“The idea that there’s a whole bunch of people in the US looking for a job and Trump’s going to give it to them is ridiculous,” he said. “This isn’t an unemployment story.”

US unemployment currently sits at a relatively stable 4.9%.

Dr Wills said Trump’s planned tax cuts to businesses and high-income earners weren’t likely to translate to economic growth and wage increases.

“There’s very little evidence that these tax cuts are stimulatory,” he said, citing a report by the International Monetary Fund which poured cold water on the idea that tax cuts for the rich could spur growth.

“Trickle-down economics doesn’t work.

“If you really wanted to stimulate economic development, put an extra dollar in someone’s pocket at the bottom of the income distribution – they’re more likely to spend it,” Dr Willis said.

While Trump’s tax plans are unlikely to do much for his working-class backers, Trump’s infrastructure spend may deliver a short-term boost. Although, it’s longer term impact on the economy is not known.

“There could be a short-term boost to employment in the areas where infrastructure is rolled out,” Dr Wills said.

“But accompanying it with the huge tax cuts at the top is exactly the wrong thing to do.”

According to Mr Sherwood, the plan could work if Trump targets the stimulus to driving growth in private investment.

“So far the recovery has been driven by consumers, not investors, if he can do that the multipliers could be very large,” he said.

But the investment analyst doesn’t hold out much hope for success.

“There’s a difference between boosting it in a cyclical sense, and boosting it in a structural sense – my guess is he won’t be able to do either in the long term,” Mr Sherwood said.

The President-elect’s plans to use tax credits to boost investment may also miss the mark in crucial areas – such as roads, bridges and education.

“Those investments aren’t commercially viable,” he said. “If he goes with his equity tax credit push – a lot of those projects will actually be priced out.”

Using immigration to stimulate growth is one option for the country, but not one likely to be embraced by Trump.

“There are two big sources of any economy’s growth rate - they are having more workers, and having those workers be more productive,” Mr Sherwood said.

“If you can’t have workers being more productive, what you simply need then is more workers. Apart from boosting birth rates – immigration is the way to do that,” he said.

“Immigration is a very easy way boost aggregate GDP,” Dr Wills said.

4 min read
Published 15 November 2016 at 2:41pm
By Ben Winsor
Source: SBS