By Ameer Ali –
President Donald Trump’s extraordinary tax cuts or fiscal handout delivered to the U.S. corporate sector and high net-worth individuals, along with his other equally extraordinary resolve to emasculate Obama Care to leave millions of ordinary American citizens without affordable health insurance and at the mercy of the medical and pharmaceutical industries, in addition to his other actions such as withdrawing from international trade and climate agreements, threat to levy import taxes on foreign manufactured goods and to punish American companies operating in foreign soils and exporting to the U.S. are all solid evidence of one indisputable fact: that is, his election slogan, “Make America Great Again” is a sinister scheme to resurrect the mercantilist economic model of the so called benevolent dictators of pre-industrial Europe. In that model economic growth was assumed to be a zero-sum game and Trump’s policies to Make America Great Again are at the expense of making others small again. To achieve this goal he is even prepared to risk one or two wars. This is evident from the way his regime is handling U.S. relations with North Korea, China, Russia, Iran and the Middle East.
The move to offer this generous fiscal handout to the corporate sector and rich individuals will certainly draw the supply siders and free marketeers to the Trump camp. The IMF, World Bank and Wall Street would welcome the Trump initiative and would urge other nations to follow suit. Even without the IMF/WB/WS pressure the contagion effect of Trumponomics will compel other competing national economies to join the Trump bandwagon. Already, no sooner the tax bill was passed in the U.S. Congress treasurer Morrison of Australia sounded the idea of following the U.S. leader to protect Australia’s tottering competitive economic edge. Likewise all OECD economies are bound to catch cold from the U.S. sneeze.
However, the economic, social and political implications of this fiscal profligacy are set to worry the leaders of many countries, both inside and outside the OECD, who are already struggling to balance their budgets and reduce national debt. The revenue short fall to the US government in particular and to others if they were to follow Trumponomics will run into trillions of dollars. To compensate for this loss governments would be forced to continue even more aggressively with broadening the tax base and cutting public expenditure, the two favourite prescriptions of the IMF and World Bank. Broadening the tax base by increasing expenditure taxes like the GST or VAT will shift the tax burden yet more disproportionately to the poorer classes of the community; and equally, measures to cut public expenditure would involve downsizing the public sector causing further retrenchment of public servants, reducing fund allocation to health and education and restricting further the welfare entitlements to the sick, aged and other vulnerable. Politically, governments would justify and market these measures in terms of achieving efficiency, increasing economic growth and creating more employment. There is no hard evidence to support these outcomes. But the impoverishment of significant sectors of the population in consequence of these measures is unavoidable.
One of the assumptions behind the massive tax cut is that it would have positive effects on investment, employment and wages. There is no guarantee that these would happen. The late Kenneth Galbraith, a witty post-Keynesian institutional economist compared this strategy with feeding a horse with oats so that its droppings from hind would feed the sparrows. The little benefits that would follow from these cuts will be no more than crumbs falling from the master’s table.
Investors are not going to invest more just because of tax reduction. They will do so only if they expect their profits to maximise, which in turn depend on the forces of supply and demand. Of course tax reduction would reduce their cost, but if the demand for their output remains sluggish which rational investor is going to bury his capital just to accumulate unsold stocks? Even if world demand increases it does not guarantee that there will be robust growth in the job market because all major economies at present are saddling with significant excess capacity. Also, the current brain-brawn saving technology is another menacing factor for job seekers to contend with. The continuous weakening of labour unions since the late 1970s has sapped the bargaining strength of labour, and profit maximising entrepreneurs are not going to squander their tax cut benefit by offering higher wages altruistically. Ethics and morals are not part of rational economics. Most probably real wages would fall even further.
Even to the U.S. economy the intended benefits of the fiscal handout may turn out to be a mirage if U.S’ competitors were to counter the Trump move tit for tat. Every initiative of the Trump administration to lure U.S. and other companies to relocate in America and to kick the U.S. economy including his punitive measures targeting recalcitrant firms would turn out to be counterproductive.
The most pernicious effect of Trumponomics will be on developing countries. These countries since the onset of so called globalization from the 1980s went almost on their knees to entice foreign capitalists and multinationals to invest in their domestic economies. Their governments offered unprecedented incentives such as rock bottom wages, tax free holidays, strict labour discipline, and lax environmental and human right regulations in order to entice foreign entrepreneurs and MNCs. Now, strengthened by Trumponomics’ attraction to relocate their enterprises in the U.S these foreigners would use Trump’s fiscal trump to extract even more concessions from these poor nations.
All in all, the fiscal handout by Donald Trump does not augur well to the prosperity of world economy and world peace. Global discontentment with neoliberal economics is already on the rise as we have witnessed since 2000, and Trumponomics quite inadvertently may speed up the collapse of the neoliberal order. Hurrah!
*Dr. Ameer Ali, School of Business and Governance, Murdoch University, Western Australia