Capital’s wishful thinking
Sections of the ruling class are now optimistic that Donald Trump will implement pro-business measures. But will they work? Michael Roberts analyses the likely impact of ‘Trumponomics’
Before Donald Trump was elected, stock markets went down every time he improved in the public opinion polls. Finance capital did not want him to win. But since his surprise election stock markets have not slumped - in fact in the US they have now reached a record high and the dollar has been strengthened. It seems that ‘the Donald’ could be a good thing for capital after all.
Much of this optimism will turn out to be wishful thinking, but wishful thinking can work the markets for a while. The thinking is based on the policies that Trump is proposing: in particular, tax cuts for the corporate sector and personal income tax cuts that will benefit the top 1% of earners. Also, he claims that he will spend up to $1 trillion on new infrastructure and investment projects around the country, along with deregulating the banks and reducing labour rights (what is left of them).
The stimulus measures are music to the ears of Keynesian economics, despite the general distaste that the top Keynesian gurus have had for Trump’s attitudes and rants. Indeed, if these policies are implemented over the next year or so, Trumponomics will be the next test of the Keynesian solution for the world economy to get out of this long depression. ‘Abenomics’ in Japan,1 following similar policies of public spending, tax cuts and quantitative easing, has miserably failed. Japan’s GDP growth has hardly moved, while wage incomes and prices remain transfixed.
But now some Keynesians are applauding Trump’s approach as ‘a break from neoliberalism’. The great historian and biographer of Keynes, Robert Skidelsky, tells us:
Trump has also promised an $800 billion-$1 trillion programme of infrastructure investment, to be financed by bonds, as well as a massive corporation tax cut, both aimed at creating 25 million new jobs and boosting growth. This, together with a pledge to maintain welfare entitlements, amounts to a modern form of Keynesian fiscal policy.2
Skidelsky goes on:
As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.
Well, liberals of the Keynesian persuasion may want to “engage” with Trump and adopt Trumponomics, but those who want to improve the lot of labour - the majority, not the top 1% - will take a different view.
Apparently, Skidelsky thinks that cutting corporation tax will create new jobs and raise growth. Well, there is no evidence that previous cuts in corporation tax have done so anywhere in the major economies. Corporate tax rates were slashed during the neoliberal period and yet economic growth has floundered. What has happened is a rise in the share going to the profits of capital at labour’s expense and a rise in unproductive financial speculation. Officially, the US has a 35% marginal tax rate on corporations, but after various exemptions it is effectively only 23% - among the lowest in the world.
Now JP Morgan economists have taken a similar sceptical line. They reckon Trump’s agenda will likely yield little impact on US employment and inflation in the next two years, while tax cuts will boost growth by only a modest 0.4 percentage points by the end of 2018 (ie, over two years) at most.
JP Morgan thinks that Trump will introduce tax cuts worth around $200 billion per year, evenly split between personal and corporate taxes.3 Interestingly, the bank’s economists also think that the so-called Keynesian ‘multiplier’ is low: just 0.6 for personal taxes and 0.4 for corporate taxes - meaning that for every $1 in tax breaks received by individuals and by businesses, aggregate demand is likely to be boosted in a given fiscal year to the tune of just 60 cents and 40 cents respectively. As a result, JPMorgan reckons US economic growth will hardly pick up at all from its current 2% a year average and will be nowhere near the 4% annual rise that Trump claims he can get.
I would argue that faster growth would depend not on more spending in the shops or more house purchases, but on higher business investment and that is what is missing from the equation. Moreover, as I have argued many times,4 there is little evidence that Keynesian stimulus programmes work to deliver jobs and growth. Skidelsky talks about the Roosevelt era of the 1930s. Actually, very few permanent or new jobs were created under Roosevelt. The unemployment rate stayed right up to the start of the war. As Paul Krugman, the American Keynesian guru, pointed out in his book, End this depression now!,5 it took the war to deliver full employment and economic recovery.
Another part of Trumponomics is to implement an infrastructure programme of building roads and communications. His plan to fund this from private money in return for ownership and revenues from the projects. This has made Krugman apoplectic, and rightly so.
Trump’s infrastructure plan is badly needed. In my blog, I have often shown the terrible state of the public services and communications in the US. The average age of America’s fixed assets is 22.8 years - the oldest in data going back to 1925. Infrastructure spending is at a 30-year low and bridges, roads and railways are crumbling before our eyes. According to the American Society of Civil Engineers, the US has serious infrastructure needs of more than $3.4 trillion through 2020 - including $1.7 trillion for roads, bridges and transit; $736 billion for electricity and power grids; $391 billion for schools; $134 billion for airports; and $131 billion for waterways and related projects. But federal investment in infrastructure has dropped by half during the past three decades - from 1% to 0.5% of GDP.
Undoubtedly, public investment in infrastructure would help the US economy and raise growth a little - Goldman Sachs reckons by 0.2% a year. But Trump’s proposal of $1 trillion spending over four years is a fake. Most of this would not be public investment at all. The funds would come from private sources, which would get incentives to provide money: the big construction companies and developers (like Trump Inc itself) will be offered tax breaks and also the right to own the bridges, roads, etc, built through toll charges on their users. Direct public spending and construction will be limited.
As Krugman explains,
Imagine a private consortium building a toll road for $1 billion. Under the Trump plan, the consortium might borrow $800 million, while putting up $200 million in equity - but it would get a tax credit of 82% of that sum, so that its actual outlays would only be $36 million.6
And any future revenue from tolls would go to the people who put up that $36 million. Crucially, it is not a plan to borrow $1 trillion and spend it on much-needed projects - which would be the straightforward, obvious thing to do. Instead:
If the government builds it, it ends up paying interest, but gets the future revenue from the tolls. But if it turns the project over to private investors, it avoids the interest cost - but also loses the future toll revenue. The government’s future cash flow is no better than it would have been if it borrowed directly, and worse if it strikes a bad deal - say because the investors have political connections.
Second, Krugman goes on,
How is this kind of scheme supposed to finance investment that doesn’t produce a revenue stream? Toll roads are not the main thing we need right now; what about sewage systems, making up for deferred maintenance, and so on? Third, how much of the investment thus financed would actually be investment that wouldn’t have taken place anyway? That is, how much “additionality” is there?
Suppose that there’s a planned tunnel, which is clearly going to be built; but now it’s renamed the Trump Tunnel, the building and financing are carried out by private firms, and the future tolls and/or rent paid by the government go to those private interests. In that case we haven’t promoted investment at all, we’ve just in effect privatised a public asset - and given the buyers 82% of the purchase price in the form of a tax credit.
During the period of ‘austerity’, from 2009, when governments tried to run budget surpluses and cut public debt after the great recession (a period we are still in), we were told by Keynesians that the ‘multiplier’ of austerity was huge (ie, growth was being reduced drastically by more than one-to-one by cutting budget deficits or government spending). Well, I have shown that this ‘strong multiplier’ is seriously open to question.7 Indeed, there is little correlation between reducing or raising government deficits or spending and growth since 2009. The best correlation with growth is with profits, not government spending.8
Recently, Nora Traum of North Carolina State University presented a paper titled Clearing up the fiscal multiplier morass.9 She found that “different assumptions create different multipliers”. She asked nine modellers, using three different kinds of models, to predict the effect on growth of three different tax reform proposals. For one reform, predictions on growth varied from -4.2% to 16.4% in the short run, and from 1.7% to 7.5% in the long run.
Recent research has shown that the best news for capital is cutting government spending rather than raising taxes to apply austerity. Reducing government spending gives more room for it than raising, say, corporate taxes, which is much more damaging to private capital and thus to growth. If we are now to expect fiscal expansion, not austerity, from Trump (we shall see), then capital will like the tax cuts, but will not want government spending (except for those developers which get the contracts) - especially if it directly interferes or replaces private investment. Such was the point against Keynesian stimulus made by post-Keynesian Michal Kalecki himself.10
Marxist economics explains why. What really drives investment in modern capitalist economies, where private capital investment dominates, is the profitability of projects. Private investment has failed to deliver because profitability is too low, but even so the public sector must not interfere.
That is the difference between Trump’s plan and that of the Chinese government in its massive infrastructure and urbanisation investment since 2009. China has spent about $11 trillion on infrastructure in the last decade - more than 10 times what Trump is proposing. This public investment, bankrolled by state banks and carried out by state companies, has weakened the private sector’s growth in China. But, as the Chinese state controls the economy, not domestic or foreign big business (much to the chagrin of the World Bank), such investment can go ahead and deliver 6%-7% annual real growth during this long depression.
Part of the Trump plan (again I hasten to add, if it happens) is to cut the tax rate for companies that hold huge cash reserves overseas if they return these funds to invest at home. Unlike other developed nations, the US taxes corporate income globally, but it allows companies to defer paying tax on offshore earnings until they decide to repatriate that income. As a result, US companies have avoided US taxes by stashing roughly $2.6 trillion offshore - a figure cited by Congress’s joint committee on taxation. The top five in order of overseas cash holdings, as of September 30, are Apple ($216 billion), Microsoft ($111 billion), Cisco ($60 billion), Oracle Corp ($51 billion) and Alphabet Inc ($48 billion).
Such an idea was tried back in 2004 under George Bush. However, the result was not a rise in productive investment, but a new bout of financial speculation. Companies got a tax ‘amnesty’, but used the cash they brought home on buying back their own shares or paying out dividends to shareholders, driving up the stock price and then borrowing on the enhanced ‘market value’ of the company at very low rates. In 2004, when US firms brought back $300 billion in cash, S&P 500 ‘buybacks’ rose by 84%.
Goldman Sachs economists reckon that this will happen again with the Trump plan. Indeed they believe that next year could see buybacks take the largest share of company profits for 20 years, estimating that $150 billion (or 20% of total buybacks) will be driven by repatriated overseas cash. They predict buybacks 30% higher than last year, compared to just 5% higher without the repatriation impact, while productive investment’s share will be little changed.
Asked what he would do with repatriated cash, should the Trump administration slash taxes on foreign profits, Cisco Systems Inc chief executive officer Chuck Robbins said: “We do have various scenarios in terms of what we’d do, but you can assume we’ll focus on the obvious ones - buybacks, dividends and M&A activities.”11
Now it is argued by some that the hoard of overseas cash shows that the problem American capital has is not that its profitability is too low. On the contrary, it is awash with profits (and profits not counted in the official stats). But here is an interesting observation by Morgan Stanley economists. Of the $2.6 trillion cash held abroad by American companies, only 40%, or roughly $1 trillion, is available in the form of cash and marketable securities. The other $1.5 trillion has been reinvested to support foreign operations and exists in the form of other operating assets, such as inventory, property, equipment, intangibles and goodwill. So it has been invested, not held in cash after all. And the cash is not so awash.
It is also highly unlikely that companies with factories overseas will shift meaningful production to the US. After all, labour remains significantly cheaper in nations like China. Hourly compensation costs were $36.49 per employee in the US in 2013, according to The Conference Board. The comparable cost in China was just $4.12 that year (the most recent figure), even after having increased more than six-fold over the preceding 10 years.
Besides, many companies that do still make products in the US are automating production. Consider Intel Corp. The chipmaker has giant fabrication plants in Oregon, Arizona and New Mexico that employ just a handful of people to keep the machines running. Nothing the Trump administration does will stop robots from taking over large swathes of manufacturing in the long run.
So the likelihood that Trumponomics will work and take economic growth up to 4% a year, as Trump claims, is very low. It is ironic that, when Bernie Sanders’ advisors suggested that a programme similar to Trump’s be adopted and would achieve 4% or more real GDP growth, mainstream economists jumped all over them, saying it was a pipe dream - correctly, in my view. But, now that Trump is advocating it, financial markets and Keynesians find it convincing.
Like Abenomics, Trumponomics is really a combination of Keynesianism and neoliberalism.12 The new spending and tax cuts are to be paid for, apparently, by more deregulation of markets and labour conditions to boost profits. This is supposed to increase the growth rate in a ‘dynamic model’ - or what used to be called ‘trickle-down economics’ - where the rich get tax cuts and spend it on the goods and services, so that the rest of us get some more income and jobs. The main incentive, according to Trump’s own economic expert, is not from reductions in the personal or corporate tax rate, but from allowing businesses to write off their investments immediately instead of over time.
What Skidelsky ignores in his paean of praise for Trump’s policies is the hallmark of Trumponomics: trade protectionism and restrictions on immigration.13 These policies are much more likely to be imposed than his Keynesian-style stimulus. Trump plans to drop the Trans-Pacific Partnership (TPP), the regional trade deal with Japan and Asia, and the Transatlantic Trade and Investment Partnership with Europe (TTIP) and ‘renegotiate’ the North American Free Trade Agreement, the regional trade pact with Mexico and Canada. The aim is to ‘protect’ American jobs and end cheap Mexican labour.
As ‘the Donald’ said last March,“I’m going to get Apple to start making their computers and their iPhones on our land, not in China.” And he wants to impose a 45% tariff on Chinese imports. It has been estimated this could drag down China’s GDP by 4.8% and Chinese exports to the US by 87% in three years, according to Daiwa Capital Markets. Even if Apple finds enough workers to assemble its products in the US, the cost of making an Apple iPhone 7 could increase by $30-$40, estimates Jason Dedrick, a professor at the School of Information Studies at Syracuse University. Since labour accounts for only a small part of an electronic device’s overall costs, most of these higher expenses would come from shipping parts to the US. If the iPhone components were also made in the US, the device’s costs could climb up to $90. That means that, if Apple chose to pass along all these costs to consumers, the device’s retail price could climb by about 14%. So Trump’s trade policies would mean a sharp rise in the price of goods in the US for a start, even assuming there is no retaliation by China.
As John Smith has shown in his powerful book, Imperialism in the 21st century: globalisation, superexploitation and capitalism’s final crisis,14 “about 80% of global trade (in terms of gross exports) is linked to the international production networks of [transnational corporations]”. The United Nations Conference on Trade and Development (Unctad) estimates that “about 60% of global trade ... consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption”. A striking feature of contemporary globalisation is that a very large and growing proportion of the workforce in many global value chains is now located in developing economies. In a phrase, the centre of gravity of much of the world’s industrial production has “shifted from the north to the south of the global economy”, as Smith quotes Gary Gereffi.
Reversing this key feature of what has been called ‘globalisation’ can only be damaging to American corporations, while at the same time shifting the burden of any cost and prices rises onto average American households.
Globalisation - the cross-border expansion of world trade and capital flows and the development of value-added chains internationally - has been an important counteracting factor to the falling rate of profit experienced after the mid-1960s up to the early 1980s in the major advanced economies. Deregulating labour rights, crushing trade union power and privatising public-sector assets domestically went alongside global expansion by multinationals. Trump now talks about reversing this counteracting factor to benefit his supposed electoral support in the ‘rust-belt’ of mid-west America that has suffered the most from the movement of American multinationals to exploit cheaper labour in Mexico, Asia and Latin America.
The irony (and the worry for capital) is that globalisation was already in trouble before Trump and Brexit. The global financial crash, the great recession and ensuing long depression (similar to that of the 1930s) since 2009 had brought the expansion of world trade to a grinding halt.
On a standard measure of participation in global value chains produced by the International Monetary Fund, the rise in profitability for the major multinationals is now stalling. Sure, information flows (internet traffic and telephone calls, mainly) have exploded, but trade and capital flows are still below their pre-recession peaks. Global foreign direct investment as a share of GDP is also falling and capital flows to the so-called ‘emerging economies’ have plummeted.
Writing on the wall
The G20 leaders met before the Trump victory and they could already see the writing on the wall for globalisation. They said they were opposed to trade protectionism “in all its forms”. As Deutsche Bank economists put it, “It feels like we’re coming towards the end of an economic era .… time is running out to prevent economic and political regime change, given the existing stresses in the system.”15
The strategists of capital are worried that Trumponomics will only makes things worse for profitability globally. Lorenzo Bini Smaghi, ex-member of the European Central Bank’s executive board and leading strategist of finance capital, commented:
Trying to reverse globalisation can be damaging, particularly for the country that takes the first step. It is the advanced economies that are facing the greatest challenges in its most recent wave, which is why anti-globalisation movements are gaining support and governments are tempted to become inward-looking. However, because their economies are so large, and so bound by the web of globalisation, they cannot reverse its course, unless emerging markets also retreat.16
And the risk is that the emerging economies could be driven into a slump, as trade falls further and capital inflows dry up. Emerging economies have been building up large amounts of debt (credit) raised from US and European banks to invest not always in productive sectors. This has not caused any problem up to now, because interest rates globally have been very low and the US dollar has been weak, so that borrowing in dollars has not been a problem.
But this is beginning to change, partly due to Trumponomics. Moody’s Investors Service has issued 35 credit downgrades this year in countries including Austria, Turkey and Saudi Arabia, while only issuing five upgrades. And 35 of the 134 countries assessed by the ratings firm currently have a negative outlook. That puts at least $7 trillion of government debt at risk of a downgrade, according to data from the Bank of International Settlements for the end of last year. This proportion of countries with a negative outlook from Moody’s is the largest it has been since 2012, and this could not come at a worse time. Interest rates on bonds, especially ones with longer maturities, are now rising sharply. If this is the end of a 35-year bull run in the bond market, governments, after years of low interest rates, might have to prepare for significantly higher borrowing costs.
At the same time, the US dollar has spiralled upwards in strength, compared to other major trading currencies, global debt relative to productive investment has been sharply increasing and emerging economies’ corporate sector debt-to-capital ratio has also risen sharply.
Low and slowing economic growth globally along with a rising cost of borrowing and stagnant trade, now threatened by Trumponomics, will increase the risk of a global slump, not avoid it.
So the Trump plans will be ineffective in getting US economic growth rates up, in delivering more jobs, real incomes and better transport. But for now, they are boosting financial markets and create a speculative boom.
Michael Roberts blogs at https://thenextrecession.wordpress.com.
1. See https://thenextrecession.wordpress.com/2014/10/13/japan-the-failure-of-abenomics.
4. See, for example, https://thenextrecession.files.wordpress.com/2016/11/the-crisis-and-keynesian-policies.pdf.
5. See https://thenextrecession.wordpress.com/2012/05/27/krugman-and-depression-economics.
8. See https://thenextrecession.files.wordpress.com/2016/11/profits-raise-investment-draft-f3r-1.pdf.
10. See http://delong.typepad.com/kalecki43.pdf.
12. See https://thenextrecession.wordpress.com/2013/06/11/abenomics-a-keynesian-neoliberal.
13. See https://piie.com/publications/piie-briefings/assessing-trade-agendas-us-presidential-campaign.
14. See https://thenextrecession.wordpress.com/2016/03/07/imperialism-and-super-exploitation.