Economic Shifts Drove Trump Win, Policy Challenges

What do the results of the election mean for economic policy, taxes, interest rate and growth?

Working-class anger drove Donald Trump’s election win, but also led to calls for policy changes that will be tough to implement without causing economic disruption, economist Joel Naroff told FEI’s Current Financial Reporting Issues conference.

Naroff, President and Founder of Naroff Economic Advisors, told CFRI attendees Trump’s win resulted from the candidate’s ability to tap into discontent over growing income disparity, reductions in middle class prosperity and slow U.S. economic growth.

“Trump recognized deep-seated anxiety among a lot of families who have worked hard over the past decade but, adjusted for inflation, their incomes have gone down — but can he actually do anything about it,” Naroff said. “…He faces an enormous challenge in changing the way income is being distributed if he’s going to satisfy his followers. That, to me, is the key question as far as this election is concerned.”

Discussing the economic plans Trump advocated during the campaign, Naroff said Trump follows a traditional Republican approach of promoting growth by cutting taxes while increasing government spending.

For instance, Naroff said, investments during the Reagan era in defense spending and U.S. infrastructure improvements helped reversed the economic malaise of the late 1970s.

But duplicating that stimulus today can be challenging because structural changes have altered the U.S. economy significantly over the past 30 years. Manufacturing plays a smaller role in the U.S. today, and broad-based expansion of the labor pool has largely stopped.

“We’re already at full employment, and seeing wage growth picking up,” Naroff said. “As a result of that, we’ll see growth in the rate of inflation if all of his programs are implemented. Traditional tax cuts and increases in spending lead to traditional deficits and traditional inflation.”

Similarly, deficit spending may be challenging to implement from a political perspective due to an element within the Republican party that insists on offsetting new programs with corresponding cuts. That pressure is increased with mandated spending reductions from the sequestration budget deal and a Democratic minority that may not be willing to support the new administration’s economic agenda.

Another challenge to fiscal planning is a potentially rosy view of the U.S. economy. Naroff said estimates calling for growth of 3.5 to 4 percent, whether in business or policy planning, are probably unrealistic given labor force expansion of less than 1 percent, as well as flat to negative productivity growth. With a shortage of qualified workers, Naroff said, economic expansion is likely to range around 2 percent.

“We have to change our perception of what good growth looks like,” Naroff said. “We all want 3 1/2 or 4 percent, and we may see it for short periods, but with an economy that’s restricted, we’re stuck. There’s no way around that.”

Trade Talk

Trade was a common topic as Trump campaigned, but the candidate’s vows to renegotiate global trade agreements may also provide difficult to implement, Naroff said.

He described Trump as a fair trade advocate, but suggested bringing countries such as China and Mexico back to the negotiating table is unlikely unless those nations see a potential advantage in amending established trade deals.

“Can you open a trade agreement? You can, but why should they?” Naroff said. “If Trump places tariffs on the Chinese and Mexicans, they’ll enact reciprocal tariffs. We’d have a trade war that drives the economy into recession and costs three million jobs…U.S. businesses that rely on China would be devastated.”