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Paul Sheard:

Trumponomics Holds Potential Solutions

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Trumponomics Holds Potential Solutions

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In an interview with CommonWealth Magazine, S&P Global Chief Economist Paul Sheard discusses the potential economic policies of incoming U.S. President Donald Trump.

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Trumponomics Holds Potential Solutions

By Shu-ren Koo
From CommonWealth Magazine (vol. 615 )

Clearly the markets reacted positively [to Trump’s election win]. I think the message from the markets seems they're expecting more pro-business, pro-growth markets. Markets are pretty unemotional. Basically what they're doing at the margin is the news that they're seeing indicating that the stream of profits in the future will be higher in risk-adjusted terms than what they had been expecting. So that's what it comes down to from the markets: Are there are going to be more dollars in the future? Is growth going to be stronger?  

Look at where the U.S. economy is today and what has been the recent sort of policy debate, and then think about Trump in that context. We had the financial crisis; we had the great recession the economy started to recover from mid 2009. It's been growing around about two percent, two point one percent since then. So it's been a recovery, but it's been a weak recovery. And unemployment has come down. The latest number is 4.7 percent. It peaked at 10 percent. If you look at the level of real GDP, it's now about 11 percent, above the pre-crisis peak. So you had the situation. It's been a recovery, but it's been a kind of a weak recovery because of the headwinds from the financial crisis.

[Former U.S. Secretary of the Treasury] Larry Summers kicked off the secular stagnation debate in November 2013. Essentially it's a world where there's excess savings and there's not enough investment relative to saving, the private sector is doing the saving; they're not doing enough investing.

Don’t Hold Back Infrastructure Investment

And so the government can play a role in investment, particularly infrastructure investment. That will both decrease macro savings because the government now will be saving less, running a bigger deficit, and it will be increasing investment. So closing that saving-investment gap will lead to higher economic growth, probably longer-term higher potential, and it will push the natural rate of interest up. So if you listen to people like Larry Summers, he was kind of supportive of large-scale infrastructure investment…If you put the politics aside and all the concerns about Trump as a president and tweeting and everything else, just look at the economics, the Trump economic policy are very much potential solutions to secular stagnation.

It's in that direction, it’s one–trillion-dollar infrastructure spending, and not being as concerned about the fiscal deficit in the short run. So it's really very close in some parts, not the trade part, but it's very close to the kind of policies that many people have been saying are really needed. It provides an opportunity for a kind of rebalancing more monetary and fiscal policy at the macro economic policy balance because now we're going to find out, we run this experiment, hopefully, maybe…and the markets are sensing this. I get to run this experiment of let's find out how much slack there really is in the labor market. And let's implement policies that would be recommended if you were concerned about secular stagnation, and in some sense we'll find out if we're in secular stagnation or not. What happens to interest rates...that's a world in which you would expect to get to full employment earlier and then provides an opportunity for the Fed to have to be able to raise interest rates because if you're getting the full employment and you're relying more on fiscal stimulus with tax cuts with infrastructure spending, then you could start to get inflationary pressures, and the Fed will have to start to take that into account. So that's also going to be very interesting to see how that plays out.

So I think infrastructure...everybody pretty much is agreed that the U.S. physical infrastructure is getting creaky and needs to be upgraded. So there's a lot of infrastructure investment that is more just traditional...roads and bridges and airports and sewage systems, electric grids, the air traffic control systems, etc. I think an emphasis on infrastructure in some ways would have been good if this had happened six years ago, seven years ago. And in fact, the Obama administration, and this is one of the ironies of the Obama administration, if you go back to 2009 and 2010, you had people like Larry Summers, who was chairman of the National Economic Council, pushing for infrastructure spending.

The infrastructure spending that really happened was much more of a sort of short-term stimulus. We now have a highway bill, for example, which just got through a year or so ago. But in some ways Trump as a Republican president has sort of stolen the Democrat clothes. Now, again, we have to wait and see how this is all put into effect. But I think as a policy thrust it's quite a positive direction. And I don't think the debt per se is an issue that should hold that infrastructure spending back.

Don't Worry about China

I don't think that China’s buying U.S. treasury bills is a major concern at the moment. The U.S. runs a current account deficit now, maybe two and a half, three percent, somewhere in that range. Yet the U.S. dollar is still a major reserve currency of the world. That may slowly change over time, but that's a fairly slow-moving thing. So the U.S., by running a current account deficit, is really supplying dollar assets to the rest of the world, sometimes it might be the Chinese, sometimes it might be the Japanese, sometimes oil producers. There is typically somebody out there that wants to hold U.S. dollars as an asset.

What major currency is there now that the global investors would want to hold as their preferred reserve currency or liquid asset or whatever? So is it the euro? No, for obvious reasons, the euro is under a lot of threats right now. Is it the yen? Well, no, the yen is not going to dominate the dollar. Is it the renminbi? Well, not yet; maybe in 20 years' time, in 30 years' time…

I think if the U.S. economy as an economy continues to do well and if the political system delivers, then I don't think a problem is going to occur any time soon. But the problem the U.S. seems to have at the moment is more a strong dollar, not a weak dollar. And every time that this issue comes up about the dollar weakening again, for the rest of the world that means a stronger currency, and the rest of the world typically doesn't want a stronger currency. They want to have a weaker currency so that they can sell more to the U.S., which is the biggest domestic market at the moment. So again, I think these are hypothetical issues, which may occur sometime in the future.

I think that there is a lot of concern about the rhetoric that has come out of the Trump campaign and soon to be administration. And so I think most economists and probably a lot of policy makers in the world are legitimately worried about an escalation of trade tensions and a trade war arising, and that is having a negative effect on global growth. So I think it's a legitimate concern. The question is ‘Is that the way that the world is going?’ I think it's too early to tell. But Mr. Trump politically campaigned on the theme of bringing back jobs to the industrial heartland. And so he presumably will, to some extent at least in terms of policy positions and policy rhetoric, follow through in that regard to a certain extent. So there definitely are some risks around that area.

I think the biggest uncertainty and biggest source of downside economic risk is, again, if there was a full-fledged trade war. Some of the rhetoric that has come out of the Trump administration-elect has been quite tough on trade, putting in tariffs, etc. So once you start doing that, there's a risk of retaliation, particularly from China.

The U.S. and China are the two largest economies in the world, and if you had a fully fledged trade war between the U.S. and China, that could get very ugly. That would not be good for growth in those two countries, but it would be even be worse for smaller trading partners. So in terms of the potential damage that can be done through trade wars, the countries that would probably feel the most damage would be small, the emerging markets that rely on exports to the U.S. or to China.

No More Free-riders

If you look at the big picture and try to think, what is Trump's message? Pax Americana...we've had the whole post-war period where on the security side the U.S. was the world's policeman, in some sense the ultimate guarantor of global security…so the whole [Trump] rhetoric is to say ‘Look, you can't expect America to be the policeman for the world.’ This is what Trump appears to say; we want our allies to be stepping up as well. So no more free riders on the American security umbrella.

That doesn't mean that the U.S. is not going to have a big military. It doesn't mean that the U.S. is going to be isolationist, but it's sort of sending a different message of saying, ‘Look, times have changed; you just can't expect Germany, Japan spending one percent of your GDP and we're spending five or six percent; you have to pick up more of the burden.’

And so I think again another one of Trump's messages is, ‘Look, we're the biggest country in the world, the biggest economy, the most powerful nation. And yet when it comes to trade deals, we haven't been striking good bargains for American workers. We've been giving too much away too easily.’ I don't think what Trump necessarily has in mind is putting up all kinds of barriers and retreating and become isolationist. It's more like serving notice that things are going to be different. And we're going to be a tough bargainer, and not just give things away and open markets.

So I think with the TPP, to Trump -I don't know the extent to which he is very familiar with the details- was probably a kind of symbol of everything that's wrong with the way that U.S. has operated trade policies in the past. So he's not going to own that. But I think it's premature…we don't know what he's going to come out with.

Trump himself says, ‘I believe in free trade but fair trade.’ So what shape is that going to take? This could be a long four years. I think a lot is going to happen. We are going to learn a lot. So I think we have to wait now and see what is going to come, what sort of frameworks would the Trump administration say is good, if NAFTA's not good, if the WTO is not good, if TPP is not good. What is good, what does good look like, and how are you going to put that in place.

Edited by Susanne Ganz


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Paul Sheard

Current position: Executive vice president and chief economist of S&P Global Ratings

Education: MS in economics and PhD in Japanese economics from Australian National University

Career: Global chief economist with Nomura Securities, member of the World Economic Forum Global Agenda Council on the International Monetary System (2010-2012)

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