“The economy, stupid”. It was the campaigning phrase that stuck back in 1992, during Bill Clinton’s successful bid for the White House. Focusing on the economy helped Clinton beat George H.W. Bush in the race for the US Presidency. A quarter of a century on, “the economy stupid” remains a popular political leitmotif, used the world over to stress the importance of living standards in any electoral contest. Donald Trump just brought that sentiment back home.
Amidst the pomp of his French visit and the latest installment of “Russia-gate”, last week saw the launch of MAGAnomomics – a new attempt to put the economy at the forefront of American Presidency. “MAGAnomics means sustained 3pc economic growth”, wrote Mick Mulvaney, Trump’s Office of Management and Budget Director, in the Wall Street Journal – combining “economics” with the President’s “Make America Great Again” catchphrase. So what are the prospects for the world’s biggest economy under Trump? Will the US perform well enough for Trump to be more than a one-term President?
Trump has by no means been the economic disaster that many feared. As his poll ratings climbed ahead of last October’s election, so did the garish warnings of a stock market crash if he won. The Dow Jones Industrial Average, the benchmark US equity index, did indeed plunge 800 points the morning of Trump’s victory. But it ended the day 1.4pc up. The 45th President’s economic program may amount, still, to a series of slogans. Yet US stocks have risen 18pc on average since Trump put his feet on the Oval Office desk.
Equity markets aside, the US economy isn’t doing too badly. The jobs numbers remains strong, with unemployment low at 4.4pc, down from 10pc in 2009. National income expanded 1.4pc during the first three months of 2017, a reasonable annual rate. What’s also impressive is that Trump got full-square behind Janet Yellen’s interest rate rises, even encouraging them. The Fed supremo has now overseen three rate increases since Trump took office, in December, March and June. While weighing on mortgage-holders, this incremental monetary tightening helps far more numerous savers – and, by signaling a return to normality, is arguably a net economic positive. Politicians typically fret when central bankers turn down the music. Yet far from discouraging higher rates, Trump initially chided Yellen for not raising fast enough.
There’s a huge question mark, though, over Trump’s economic policy and the stated goal of 3pc annual growth – namely his inability, so far, to secure meaningful tax reform. Trump’s campaign rhetoric, when he wasn’t talking about “confronting China” and “building walls”, contained a lot about lowering taxes. His fiscal spiel is Reaganite – like his celebrated 1980s predecessor, Trump wants to “ride the Laffer curve”, lowering taxes sharply in the hope that, via faster resulting growth, the overall tax take rises.
So far, though, Trump has struggled to deliver a fiscal stimulus – a failure that recently prompted the IMF to sharply cut its US growth forecast for 2018 from 2.5pc to 2.1pc. Trump’s officials have also vowed to boost growth by getting tax legislation to the floor of Congress in September, while pushing through an infrastructure spending blitz.
Despite the Republicans controlling both the Senate and the House of Representatives, party political in-fighting – and the stream of Trump-related political crises, self-imposed and otherwise – have repeatedly delayed measures to cut corporation tax and deliver broader tax simplification. Trump’s tax package is vital to his economic narrative, yet the political squabbling will likely get worse before it gets better.
That’s because, even if the Laffer curve holds, tax cuts costs money in the short run – which will add to the US national debt. “Even with an ideal constellation of pro-growth policies,” says the IMF, questioning Trumpian economics, “the potential growth dividend is likely to be less than that projected…and will take longer to materialise”.
For my money, I think the US economy will stay relatively strong. I’ll also chance my arm and predict that Trump will win a second Presidential term. The Republicans have already prevailed in a series of special elections this year – notably in Atlanta and South Carolina but also Kansas and Montana. The opposition also have no credible candidate – one reason Former New York City Mayor Mike Bloomberg, a leading Democrat, says Trump has “more than a 50pc chance” of winning in 2020.
For all the garish headlines about Russia and misogyny, Trump’s approval ratings remain strong. The more the Democrats and their media allies throw at him, the more he claims “witch-hunt”. It’s a tactic that, on balance, seems to work.
The dangers for Trump lie elsewhere. Every two years, Congress must pass budget agreements to lift the ceiling on the US national debt – about to top a staggering $20,000bn. Since March, the US Treasury has relied on “extraordinary measures” to keep government running, ahead of the current deal expiring in September. Expect to hear a lot more about America’s “fiscal cliff” over the next few months, as the US flirts once again with the threat of sovereign default.
If Trump can mollify his party, this summer’s inevitable fiscal crisis could presage a much bigger deal, with the President getting the tax cuts he and much of his party wants. But if the Republican powerbrokers in Congress tire of his antics, this looming debt-ceiling row could spark the beginning of Trump’s demise.
Congress is packed with fiscally conservative Republicans outraged Trump has high-jacked their party. It will be his own party that removes him, if he is to be removed. My hunch – with a prevailing economic wind, the Donald will survive and become a two-term President.