With his left hand resting on the Bible, on Friday January 20 Donald Trump took the oath on the west stairway of Capitol Hill, the seat of Congress, becoming the 45th president of the United States of America. A scenario that until recently was unpredictable. Equally difficult is to imagine today what the next four years will be like.
The uncertainty about the new president's moves is unprecedented. Some of his statements - and many of his tweets - on issues of foreign policy, immigration, alliances and international agreements are a source of anxiety, in the United States and around the world. On the other hand, a certain optimism prevails on the economy.
The positive expectations on Trumpnomics are essentially due to three reasons. The promise to simplify and reduce tax rates and, at the same time, to make heavy investments in infrastructure and defense will stimulate growth (an increase of an additional two points of GDP is estimated).
Second, Trump is generally perceived as business-friendly. For several reasons. A significant example is the probable reduction in corporate taxation which, among other things, should favor the repatriation to the United States of approximately 1,4 trillion in profits of American multinationals now parked abroad.
An important cash flow that will translate into investments or dividends. Finally, some sectors - energy, defence, infrastructure, partly pharmaceuticals - should benefit from the new course. This has already led to higher stocks and could translate into investment and employment.
Fears of tariffs and trade war
The general optimism about the economy is only partially mitigated by the possibility of customs duties being imposed. That promise was effective on the campaign trail but is difficult to implement because a trade war would also hurt the United States.
Suffice it to say that, between 2010 and 2014, General Motors sold more cars in China than in the USA. Furthermore, in a world characterized by the division of production within global value chains, many imports from China and Mexico – such as steel, automotive parts, industrial plastics – represent raw materials or intermediate goods for American exporters.
Paradoxically, therefore, duties on certain imports would result in a tax on American exports. Trump's economic advisers, and much of Congress, are aware of this and will try to contain the aggressiveness of trade policy. There will be room for some symbolic skirmishes with China and Mexico, for image issues, but it is unlikely that the United States will unleash trade wars with unpredictable consequences.
Interest rates and public debt
So all right? In the short term, probably yes. There will be benefits on growth, corporate profits and employment. But in the medium to long term the situation is more complex and presents many risks.
First, it is possible that the stimulus to growth will be less effective and less lasting than expected. For two reasons. Rising interest rates strengthen the dollar by making US exports less competitive around the world. Furthermore, with an already very low unemployment rate – the current 4,9% is considered close to full employment – the expansionary measures have little impact.
A serious medium to long-term risk is given by the fact that all the maneuvers foreseen by Trump involve a further increase in the already enormous public debt. Debt sizes and rising interest rates will make it increasingly onerous to service and finance it. Another time bomb is the social security system - unsustainable in the long run - for which Trump does not envisage any reform.
Another relevant unknown is the management of the exit strategy by the Fed, which after years of expansionary monetary policy reversed the trend. Too abrupt a braking could reawaken the fear of a recession; one that is too mild could fuel inflation fears.
Then there is the risk that the large amount of capital that is returning to the United States attracted by rising interest rates will lead to the overvaluation of some assets or financial sectors, forming new speculative bubbles (of which the last financial crisis has shown the possible disastrous consequences ).
Strategic challenges
The real weakness of Trumpnomics is the lack of attention to some strategic issues for the American economy in the medium to long term. The focus of the new republican administration, in terms of stimulating growth and employment, seems to concern traditional sectors, such as the automotive and other manufacturing productions. The reason is clear: many workers in these sectors voted for Trump on November 8th.
But are these the strategic sectors on which the United States must focus? The engines of growth with greater long-term prospects are others. They are those characterized by innovation, creativity and knowledge, those with a high concentration of human capital, who invest in research and attract people with high levels of education. However, beyond a meeting with the heads of some Silicon Valley companies, Trump doesn't seem to have a plan for these sectors.
Finally, it is important to note that Trump's agenda does not include any measures to manage the increase in income, wealth and education inequalities. A paradox, because the widespread malaise generated by the increase in inequality was a decisive factor in the tycoon's electoral victory.
It is possible that, during his mandate, the president will adjust the shot and introduce interventions in this sense. Not addressing these phenomena can have very negative consequences, not only on the upcoming elections but more generally on the American economy and society.
Optimism on economic recipes
Some short-term optimism about Trumpnomics is not unfounded. The stock market rises of the last few months seem to confirm this. Trump's economic policy is likely to favor a few years of growth in the US. However, it would be short-sighted to underestimate some important long-term risks. The American economy, although in better conditions than the European one, in fact shows worrying fragility.
