Donald Trump’s New New Deal

What a surprise: Trump gets elected in spite of the media’s projections — and yet, financial markets didn’t crash. Instead, they leaped to all-time highs.

Could it be that President Trump won’t be as bad for the world economy as many feared? Could Trump even be the game changer who manages to pull the United States (and indirectly the world) out of a period of sustained low growth, shrinking productivity gains, low interest rates and increased social tensions?

The current medicine isn’t working

Trump is the first leader of a G-20 country to openly aim for a fundamental shift in economic policy. Seven years after the financial crisis, it has become obvious to everyone that the medicine applied by politicians and central bankers is not working.

Low interest rates, quantitative easing and more debt have stabilized the economy, but they have not been enough to get the economies of the West back onto a growth track.

On the contrary, the side effects of the medicine are undermining social cohesion. Rising asset prices benefit the wealthy even as growth stalls, with economic renewal grinding to a halt as noncompetitive companies stay in the market.

The U.S. situation

To illustrate this point, just look at the situation in the United States:

1. U.S. economic output is still 7% below its pre-crisis trend.

2. While the official unemployment rate is low by historical standards (at 4.9%), U.S.labor force participation of men and women in their prime working ages (25 to 54) is the lowest since World War II. In the case of women, it is among the lowest of all OECD countries.

3. The median income of U.S. households is lower than it was in 2000, while the cost of living — particularly in the areas of education and health care — has exploded.

4. Since 1980, the share of the top 1% in pre-tax income has increased from 10% to 18%. As a result, the United States has the highest level of income inequality of all Western nations.

5. U.S. corporations have used low interest rates to buy back shares rather than make new investments. This has led to the highest level of corporate debt burden of U.S. corporations since World War II.

6. The rate of new business startups in the United States is at a record low.

The situation in Europe

Even so, the United States is in much better shape than Europe. There the euro works as a growth-killing engine, locking the periphery in a noncompetitive fixed currency regime.

Meanwhile, German politicians are still fond of celebrating export surpluses of close to 9% of GDP(!). They have yet to learn that these surpluses lay the foundation for the end of the euro project and will lead to significant losses for German savers once the day of reckoning comes.

This day of reckoning might be closer than many German politicians, business leaders and the public at large expect. For Donald Trump, Germany — like China — is a trade manipulator benefiting from a weak currency.

If Trump actually implements the protectionist policies he announced during his campaign, it would surely have a very harmful effect on export-dependent countries like Germany and China and on overall global growth.

History shows that countries that run trade surpluses suffer most from protectionism, while deficit countries do relatively better.

A new New Deal

Other aspects of Trump’s program are very sensible — and indeed could change the whole game. The idea of investing massively in U.S. infrastructure and lowering taxes has the potential to overcome the secular stagnation the U.S. seems to be locked in.

Similar to Franklin D. Roosevelt’s New Deal policies, Trump could help boost wages for U.S. workers and generate economic growth and inflation. This would have the simultaneous effect of lowering the debt burden of private households and corporations relative to GDP.

Rising interest rates could foster a necessary adjustment in the economy by forcing noncompetitive companies out of business. (This kind of adjustment, of course, is easier to stomach during an economic expansion.)

Return of Reaganomics?

All this would help boost U.S. productivity and therefore increase not only economic growth in the short-term, but also the mid- to long-term growth potential of the economy.

And if Trump can give U.S. corporations a strong incentive to repatriate the dollars they hold abroad for tax reasons, he can pull this off without adding significantly to the U.S. debt burden. (Any remaining deficit can be easily financed, given the still very low interest rates.)

Such a policy mix may sound a lot like the Reaganomics of the 1980s. Funny enough, it is also exactly what left-leaning economists like Larry Summers and Paul Krugman have proposed in the past. With the Republican Party controlling both houses of Congress, President Trump should be able to make it happen.

Pressure on Europe

Trump’s economic policy also has the potential to change the global economic landscape.

Any relative improvement in the U.S. economy — especially if linked with protectionist measures and/or a devaluation of the U.S. dollar — would increase economic and political pressures on Europe.

If growth picks up in the United States, lower growth in Europe would again underline the Eurozone’s failed policy responses of the past several years.

More and more governments would be compelled try to follow Trump’s approach. This would lead to severe conflicts with a German government that remains focused on fiscal rectitude.

Along the way, more and more countries in Europe will look for new leaders — and find them in politicians tempted to follow Trump’s electoral approach. Given the weak status of the European economy, they stand a good chance of winning.

The end of Europe?

The next dates to keep an eye on are Italy’s referendum on constitutional reforms (December 4) and elections in France, the Netherlands and Germany in 2017.

In all of these elections, we are likely to see an upheaval. This has the potential to push Europe a step closer to the end of the Eurozone and the EU as we know it.

Some fear that the new nationalism we see in politics will lead to a repetition of the Great Depression. The truth is, just as in the 1930s, this new nationalism is the result of a depression.

In spite of all the intervention we have seen during the last seven years, a new great depression was not prevented. Rather, we got a depression in slow motion.

As long as politicians fail to recognize that we need to reduce the burden of debt significantly, we will not see a return to pre-crisis growth. Trump’s policies have the potential of achieving this in the United States.

And even if they don’t, they will without doubt increase the pressure on Europe to act.