Trump Trumps

Spearhead Analysis – 10.11.2016

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

american-elections-2016While the media pundits and the Democrats seemed ‘confident’ of a Clinton win, the voters ushered in a totally different result. Mr. Donald Trump, a man riled and often ridiculed by the Democrats and the media, trumped the hopes of the Democrats with a resounding victory. Perhaps, the over-confidence and unfounded exuberance of the Hillary camp led them to believe in a victory before it was actually won. Or perhaps Mr. Trump spoke from the heart and appealed to the millions of Americans and won. Whatever, the reasons he is all set to take charge as the 45th President of the United States in January 2017, a big and proud achievement by any standard.

There were some glaring voting patterns that emerged from the elections:

  • Mr. Trump made large gains across rural America, helping to defeat Hillary Clinton and her urban supporters.

  • His most significant support came from counties in the industrial Midwest where whites without a college education are the majority.

  • Mrs. Clinton made gains in big metropolitan areas, but she was soundly rejected in smaller cities, especially in the industrial heartland.

  • Mr. Trump ultimately surpassed 270 electoral votes by flipping several states that President Obama won in 2008 and 2012, including Pennsylvania, Iowa, Florida, Ohio, and Wisconsin.

The election result was a bitter blow for the Democrats and more so for Mr. Barrack Obama who had come out in full support for Hillary Clinton, never mincing his words in trying to run down Mr. Trump. It also is a confirmation that the Americans do not want a status-quo and are looking for a new direction that is more inward focused and potentially beneficial for the Americans. Looking back at the pre-election rhetoric one wonders how the new President would come through on the campaign claims.

Economy:

Mr. Trump has made a number of promises on the economic front, meant to boost economic growth. Infrastructure is an area that he aims to focus on to energize the economy by putting millions of people to work to rebuild America. During his campaign he had highlighted the poor state of bridges, while pledging support for the road networks and airports. Parallels can be drawn with Pakistan where we continue to witness the unabated stress on bridges, roads, and trains by the PML-N led Government as part of its strategy for economic growth.

Mr. Trump had indicated that he would spend around $500 Billion on infrastructure along with a proposed $137 Billion in tax credits for private firms that are willing to spend on construction. He has proposed a number of tax cuts, including reducing the Federal corporation tax rate by more than half from 35% to 15%, as well as simplifying the income tax regime. At the same time he has indicated an increase in defence spending. Pakistan has been ‘toying’ with expanding the tax net to increase the revenue base, without much success. Let’s hope Mr. Trump fares better.

From an Economists standpoint such a plan for increased Government spending would provide a short-term boost to the economy. However, unsustainable borrowing to fund the spending can create turbulence in the future, especially when the spending focuses on non-revenue generating development, particularly when the country relies on foreign investors to fund its debts. Again, a scenario eerily similar to the policies being pursued in Pakistan where the unbridled growth in internal and external borrowing is being used for ‘developmental’ projects with the country having firmly fallen into a debt trap with cripplingly high levels of debt.

The Committee for a Responsible Federal Budget estimates that Mr. Trump’s plans would add approximately $5.3 Trillion to the US national debt. It is estimated that the proposed fiscal stimulus will lead to a doubling of outstanding federal debt in the next decade and to a dramatic widening of the US primary deficit. Mr. Trump’s spending plans could prove inflationary – particularly if his policies restrict the supply of workers from abroad, which could push up wage inflation – forcing the Central Bank to come up with rate hikes over time.

Larry Hatheway, chief economist at GAM stated, “The US economy is now close to full employment and, as the latest figures suggest, wage inflation is beginning to accelerate, …… US fiscal expansion is therefore likely to elicit a more rapid series of Fed rate hikes than would have been expected in a Clinton presidency.”

Immigration:

Mr. Trump’s most prominent promise has been to erect a wall along the US-Mexico border – paid for by a $5 Billion to $10 Billion contribution from Mexico – to reduce immigration. After the election results the shares of cement and construction-related firms rose rapidly, even though the actual implementation of the construction plan remains unclear. He has also stated that he aims to restrict migrations from particular religious groups, notably Muslims. It appears to be a part of a wider plan to revamp the immigration controls to boost wages and to ensure that jobs are offered to the American workers as a priority while implementing restrictions on who can be allowed to enter the United States. There is a possibility that this policy could fuel labour shortages, which could in turn impact the economic growth while creating inflationary pressures within the economy.

The proposed policy of selectively restricting immigration based on religion and national origins, seems at odds with the American dream of Liberty and Equality. Mr. Trump has been adamant that he would enforce immigration laws to reduce the immigrant population through deportation of undocumented immigrants, a number that is estimated to be close to 11 Million people.

Trade:

Mr. Trump has spoken vociferously against free-trade deals such as the NAFTA pact with Mexico and Canada, and the forthcoming Trans-Pacific Partnership (TPP) between America and 11 other Asia-Pacific countries. His stated remedies have included declaring China a currency manipulator, promises to put TPP talks on hold, and threats to place tariffs of 5% to 45% on imported goods. He has also stated that he would ‘cajole’ firms such as Ford, Apple and Boeing to manufacture more of their products in US, with some tax incentives. He has come out as a strong proponent for bringing back protectionist policies. Such a protectionist regime could create a paradigm shift giving rise to a global trend towards protectionism with far-reaching impact on the global trade. A trade war by the US could trigger a knock-on effect for the US economy.

Conclusion:

How far will Mr. Trump go in enforcing his pre-election rhetoric remains to be seen. Yet, the United States has voted for change and they will definitely get change. How this would change the global economy remains to be seen. Strong parallels can be drawn between the US and Pakistan elections. Firstly, the pre-election rhetoric of PML-N leadership fell rather flat, particularly in terms of the tall claims about resolving the power shortage issue and the ballooning circular debt. Secondly, the impact of the rural vote has been tremendous for the Republicans, a factor that perhaps did not play such a polarizing and determining role in past elections. In contrast election results in Pakistan have usually been determined as a result of the rural factor, which some opposition parties appear to have difficulty in tapping. Thirdly, the non-College degree voters played a vital role in tilting the election results. Pakistan has a majority of population within this category of voters. Again opposition parties within Pakistan, need to assess their strategy for tapping into this segment. By concentrating on educated, urban voters elections will never be won in Pakistan.

Just as Mr. Trump has proposed a big focus on spending for infrastructure, the government in Pakistan has been pursuing a similar strategy. The increasing debt burden as a result of the focus on ‘non-developmental’ development is raising concerns in many quarters. As it is there is an abnormally high level debt with little to show in terms of increase in revenue generation. A sure-shot recipe for disaster in the long-run. Mr. Trump like Mr. Nawaz Sharif is a businessman, let’s see how his policies pan out in the long run. It could lead America towards a more protectionist and isolationist path if the policies he proposed are implemented in letter and spirit. One can only hope that he would be good for America and the World. After all, when USA sneezes the world catches a cold.

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