Mr Trump is a smart man. Data suggests that there are four headwinds – demographics, education, debt, and inequality – that are hitting the US economy. Trump chose protectionist strategies, taking these factors into account.
Consider demography. The high growth of the US economy during the seventies and eighties was because of a younger working-age population, and women entering the labour force. But now, with the retirement of baby boomers and a smaller working-age population, labour force participation has fallen.
This means lower US real income but more government spending on welfare. The elderly population needs protection in terms of greater social security, specifically lower medical costs – something that Trump promised.
Fall in Labour Productivity
About education, the costs of a US college education are higher and there are many dropouts. College completion rate in the US is around 15 percentage points lower than its neighbour Canada. Higher costs of education have been the reason many young Americans have quit education partway through, which has a negative impact on productivity.
A fall in labour productivity has led firms to hire fewer people. Recent data suggests the hourly wage rates of contractual factory workers has fallen. The promise about imposing 35 percent tax on American firms outsourcing jobs or building factories outside the US, signalled that Trump cares about unemployed Americans. By targeting China, Trump was able to woo voters from the Rust Belt states such as Michigan, Wisconsin and Iowa, who believed that their jobs are being lost because of cheaper Chinese imports and Mexican labour, and not because of a fall in labour productivity.
In reality, this fall in labour productivity and jobs loss are fuelled by a paradigm shift in technology. Technological innovations are no longer inclusive, the way they were over the last 150 years.
For instance, in travel, the economy graduated from horse-driven buggy to Boeing. In computing power, the present-day mobile phone handsets have more computing power than the computer that launched the first rocket to the moon. All this was instrumental in improving productivity and real income growth in the US in a way that no one has ever imagined before. But no longer.
Few Takers for Low-Skilled Labour
In this age of data algorithms, 3D printers, and tech start-ups, wealth is getting concentrated in the hands of a selected few. The US regulators have already approved smart pills which send highly accurate diagnostic information from inside patient's bodies to doctors via bluetooth. Very soon, the computing power of the mobile handset will equal that of the human brain.
A significant societal dislocation is waiting to happen as machines and robots take human jobs. In this highly automated manufacturing regime, firms and start-ups owners are likely to corner a larger share of wealth, but not low-skilled labourers.
The USA has already transformed into a gig economy, where the labour market is increasingly characterised by prevalence of short-term contracts or freelance work as opposed to permanent jobs. This will hasten income inequality. The US labourers are without jobs and becoming poorer not because their jobs are taken away by the cheap foreign labour, but because of advancements in technology.
Can Trump increase US growth, particularly, with lower labour productivity? In fact, increase in government spending with lower tax collection from corporations means a higher fiscal deficit. Tax collections are falling because of technological nature of business with companies like Google, Facebook, Netflix, etc., paying lower tax in comparison to manufacturing firms. Federal government debt as a share of GDP is growing very rapidly: from US$ 5 trillion in 2001 to around US$ 20 trillion at present.
Boosting the US Economy
Debt in the private sector is also increasing. The promise of a lower tax regime, and hence future potential profits have led many fund managers to start buying US junk bonds, taking the US stock market to an all-time high. In a longer time horizon, without inclusive innovation, rising fiscal deficit cannot be sustained. In fact, higher fiscal deficit without a concomitant increase in productivity will lead to an increase in interest rate. This may have a negative effect on investment and future employment generation.
What about the trade part? The biggest categories of US exports are aircraft, automobiles, and pharmaceutical – predominantly high-skilled manufacturing items. To an extent, it was possible because of US open arms policy, welcoming global talents. Clamping down on skilled labour immigration may dent productivity. It will also hurt skilled labour force participation.
Trade and economic power matter. Russia is a waning superpower but China is not. Things would have gone for a toss if the spying allegation was raised against China. In the worst case scenario, if protectionist policy fails to lift the US economy, Trump may have to engage militarily to regain America's lost pride. The free trade policy was able to prevent war for decades but may be no more.
(The author is Professor, Bennett University and can be reached @banik_nilanjan. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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