Another America: why trump won’t be able to repeat the success of Reaganomics

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The desire of the new administration at the same time to deal with immigration to return to industry home and lower taxes leaves little chances of success

After a couple of weeks since the election, Donald trump President of the United States the markets have already recognized him almost a new Reagan. On November 9, the S&p 500 index rose more than 3.4% and the Russell2000, which includes shares of small and medium companies 11%. On 22 November four us index, the DJIA, S&P500, NASDAQ and Russell2000 simultaneously reached the record for the first time since December 31, 1999. The dollar strengthened against foreign currencies by 4.5-7.5 percent, and the Mexican peso more than 10%. Even oil went up, although the energy plans of the new President, at first glance, were not given for any reason.

Whether trump is the new Reagan, we will see in some time, but already today it is possible to note at least three things that put it in a completely different position than that in which there was a Republican President early 1980s.

Services instead of cars

First, the structure of the U.S. economy has changed dramatically. In 1980, America was a model industrial country trying to defend themselves except from Japanese cars. The trade deficit stood at $25.5 billion, the balance of payments was positive (+$2.3 billion), and U.S. assets abroad exceeded foreign ownership in the U.S. almost 40%. More importantly, the import was at the level of 8.9% of GDP, and 32% were oil and oil products. Finally, the share of mining, manufacturing industry and construction in GDP was 28%. In this situation, the growth of activity in the industrial sector can, indeed, lead to a significant revival of the economy as a whole.

Now the situation is completely different. USA — the world’s largest importer of their foreign trade deficit reached in 2015, $531,9 billion and a negative balance of payments — $562,1 billion, Respectively, imports grew to 16.5% of GDP, although the share of oil and oil products declined to 6.7%. The share of industry and construction in GDP fell to 13.9%.

Today the US economy is a conglomerate of two sectors: the service sector, which is not exposed to international competition and in which prices are constantly rising, and industry, which is forced to adapt to global competition and transfer of Assembly production abroad. Economic growth is being achieved mainly by the fact that incomes are stagnating (which creates good conditions for entrepreneurship), but the standard of living increases due to cheaper imported goods with the simultaneous rise in price of services. Thus, the average cost of a mobile phone in the U.S. declined in nominal terms since 1995 in 9 times, clothing for the mass market in 3-4 times, furniture — more than a third of the price of cars has not changed, while the average bill in a cafe doubled the taxi fare is 2.3-2.7 times, hotels have risen more than 2.5 times, and public transport is almost triple.

Cheap import saves American small business in the service sector and supports the consumer standards of the population. If trump tries to “return to industry home” win 3-5% of the population, and lose the other 95%. The only chance to the industrial sector began to develop, is the decline in prices in services and catering, arrangements for which the government has no (especially if it intends to deal with immigration). Thus, the main promise of the new President may not be feasible.

Loans and rates

Secondly, the American economy over the past 30 years seriously “relax”, accustomed to work under highly concessional lending regime and relatively low costs. In the first year of Reagan’s presidency, the average rate on 10-year government Treasury securities was of 13.92% per annum; in the year when the elections were won by George W. Bush — of 6.03%; this year it does not exceed 1.85 percent.

The main goal of Reagan was to reduce interest rates significantly and provided an economic boom. The administration trump will face likely increases. In addition, in 1980 American consumers were not so leveraged: loans granted to individuals amounted to $962 billion, or 34.5% of GDP. Now this figure (including mortgage loans and student loans) is us $15.1 trillion. 84,2% of GDP. The rate increase of at least 10 b.p. take it out of the pockets of consumers up to $140 billion per year, which will significantly reduce consumer spending and will further reduce demand, which is so necessary for economic recovery.

Future growth rates can not affect the budget problems, increasing the cost of borrowing and cost of servicing public debt. The budget only started to improve (the deficit fell from a record $1.46 trillion. in 2009 to $438 billion in 2015), and additional tests are not necessary. Meanwhile, trump offered by the program of rearmament of the army and infrastructure development will require significant additional expenses, which will increase the cost of government borrowing and push the General level of interest rates, which is absolutely contrary to all the prescriptions of “Reaganomics”.


Finally, we should not write off from the account and the third issue — immigration. In recent decades the American economy has largely grown due to unprecedented increasing employment, including in sectors where wages were extremely low. The minimum hourly wage is currently $7,25/hour versus $2,90/hour in 1980. This means that for 35 years adjusted for inflation it dropped by more than 14%. The reason (apart from the reduction in price of imported goods) is simple: the increase in the number of employees and, accordingly, competition. If in 12 EU countries the total labour force increased from 1980 to 2015 by 9.6%, the US by 47% and natural population growth contributed less than half of the growth in total employment. Contrary to widespread opinion, the US economy in 2000-2010 years has grown more extensive than intensive.

If trump starts a major offensive on immigration, expect a sharp deterioration of the U.S. economy. First of all, reduced supply of cheap low-skilled labor, which (as in Russia) is predominantly imported, and the place which the Americans will not take no increase in salary. Such an increase, even if it happens, almost does not increase fees, taxes (Americans are starting to pay income tax mainly on income above $10.7 thousand per year, and because the majority of legal migrants engaged in manual labor, did not pay taxes), but will significantly increase manufacturers ‘ costs. Together with exclusion from the workforce of a considerable number of alien workers and reduce the total amount of income it will lead to a sharp drop in demand for most cheap goods, and a wide range of services that will cost the economy 0.7-1.1% of annual growth.

This is contrary to the approach of Reagan, in which immigration has grown (from 394 thousand in 1980 to 1.09 million in 1989), and only one Immigration Reform and Control Act of 1986 legalized stay in the country for more than 3 million illegal migrants, of which trump now promises to send home.

Thus, in the way proposed by the trump of reforms there are several serious obstacles, and all of them are somehow related to globalization — economic, financial, and social. USA could “become great again” during the Reagan largely because he was able to “ride” the wave of globalization: to engage in the global market economy China and the Soviet Union; to intercept Japan’s and Europe’s technological leadership; to “restructure” the economy with a massive industrial production for services and locally produced goods. Today trump, stressing mainly on the reduction of taxes (but it cannot be radical when Reagan came to power, the highest income tax rate was 70%, but now a 39.6%), wants to return to the era of “Reaganomics”, not noticing that the situation now is quite different. I do not exclude that some “shake” it can provide, but I seriously doubt that it will cause decades of front growth and ensure America a qualitatively new model of development.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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