Trumped-up trickle-down economics
American generosity might be in especially short supply as a result of a second side-effect of Trumpian Reaganomics. As the dollar soared in the early 1980s, America’s current account flipped from a small surplus into sizeable deficit. American firms howled. Efforts early in the 1980s to cajole trading partners into limiting exports gave way to more serious interventions later on. In 1985 James Baker, then treasury secretary, negotiated the Plaza accord with Britain, France, Japan and West Germany to bring down the value of the dollar. And in 1987 Reagan slapped economic sanctions on Japan for its failure to meet the terms of an agreement on trade in semiconductors.
Mr Trump, no instinctive free-trader, might face a similar dynamic. Faster growth and higher interest rates might attract foreign capital and place upward pressure on the dollar, which has indeed been rising since the election. That will help exporters to America and hamper a manufacturing revival in the struggling towns that helped Mr Trump win. In fact, the Mexican peso has fallen by about 10% against the dollar since the election, boosting the competitiveness of Mexican firms relative to their American counterparts. Yet Mr Trump will find responding to these shifts to be trickier than did Reagan. Sprawling supply-chains mean that punitive tariffs are less obviously useful to domestic firms than they once were. A battle over exchange rates between America and China could prove far more dangerous, both economically and geopolitically, than Mr Baker’s negotiations.
Perhaps most important is a third lesson: that the boost to growth provided by tax cuts and liberalisation need not be spread evenly across the economy. Prescriptions which made sense a generation ago look inappropriate now. Top marginal tax rates are far lower than they were then; further cuts may deliver a smaller boost to growth as a result. Meanwhile, inequality is far higher now than it was in the early 1980s; slashing tax rates on the rich while unravelling recent financial regulation could push economic divisions to unprecedented, politically toxic levels. The global economy could use more fiscal stimulus. A raft of regressive tax cuts from a protectionist-minded American administration is, to put it mildly, a risky way to provide it.